Watch Sunpower as Solar Continues to Grow

Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Like any new technology with big promises, solar energy is easy to criticize. Many have pointed out that grid parity seems to get pushed further out every year. Those with a flat world view can easily forget that geography plays a big role in solar installations. Arguing for a new utility scale solar installation in the middle of Ohio is not an easy sell. With coal and natural gas close by, a more traditional power plant is very attractive.

The reality is that solar energy is cost effective, but its profitability changes with geography. Recently the islands of Tokelau have become fully powered by solar. These islands are very small, and the obviously the market size in Europe, the U.S., or Japan is many times greater. The lack of domestic energy supplies and availability of sunlight made solar economical in this island. Japan is a much larger market that faces a similar lack of domestic energy supplies. A recent presentation by YGE shows that solar is just starting to become profitable in Japan. As a whole the solar industry is expected to regain its strength in 2013. 

Why Sun Power? 

SunPower (NASDAQ: SPWR) makes some of the world's most efficient solar panels. In the latest quarterly report their mean cell efficiency came in at 23.5%. At the same time thin film competitors posting efficiency numbers around 12.7%. In densely populated markets like Japan, differences in efficiencies play a huge role. More efficient panels require less space and fewer parts, which helps to keeps costs down and increase competitiveness.

Sadly, SPWR is not a screaming buy. They are expected to post an EPS loss in 2012 and 2013. The first three quarters of 2012 have resulted in a loss of $1.76 per share. The encouraging news is that they have been able to maintain a gross margin of 15.6% and a total debt to equity ratio of .74. The backing of the firm by France's Total helps to provide stability and capital as the industry sheds its production overhang. In the long run SPWR's high cell efficiency will help it grow in solars' growth markets and help bring SPWR back to profitability. 

SPWR Operating Income Quarterly data by YCharts

First Solar (NASDAQ: FSLR) is one of the strongest solar manufactures on the market. With a low total debt to equity ratio of .15 and gross margins of 32.8%, the financial statements are positive. However, over the coming decades their decision to focus on less efficient thin film technology may be a limiting factor. In the last quarter their average efficiency was only 12.6%. Over the medium term FSLR's strong margins, current operating profit of $107 million, and low debt load paint a very positive picture. As Japan starts to open up to solar, FSLR will have to work hard to make their products compete against more efficient panels. 

Firms to Avoid 

Canadian Solar (NASDAQ: CSIQ) and Yingli Green Energy (NYSE: YGE) have high levels of debt and low margins. CSIQ's gross margin of 7.4%, total debt to equity ratio of 2.47, and quick ratio of .4 suggest that if the firm needs to improve profitability very quickly. SPWR has a quick ratio of .6, but its debt to equity ratio of .74 puts it a much more secure situation.

YGE's quick ratio of .2, total debt to equity ratio of 3.79, and low gross margin of 8% paint a bleaker picture than that of CSIQ. The recent U.S. tariffs on Chinese panels only adds more stress upon YGE. They may be able to get through the current difficulties if the Chinese government doesn't allow them to go through bankruptcy. For investors, a wait and see approach is the most prudent strategy. 

Conclusion

SPWR's highly efficient solar technology gives it a clear advantage as solar reaches grid parity in real estate constrained nations like Japan. Their 25 year warranty is longer than the warranties offered by their competitors and helps to great a strong value proposition with the customer. SPWR's negative EPS for 2011, 2012, and expected loss in 2013 decreases their attractiveness, but does not change the fact that over the long run SPWR has a bright future. 


MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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