The European Party Is Over
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Forward thinking European nations like Germany and Spain have paved the way in developing solar power. The problem is that recessions and massive unemployment have a habit of stopping government subsidies. Investor confidence in the Spanish clean energy projects has been destroyed after the government announced it would retroactively cut subsidies. Germany recently stated it would pull the plug on its subsidies by 2018. Now, a number of solar manufacturers will feel the pain from these cuts.
Look at China
Yingli Green Energy (NYSE: YGE) is a powerful Chinese solar manufacture, and its European prospects are falling. The European Union is looking to slap tariffs on Chinese panels. In 2013 the company expects German shipments to fall to 20% of all shipments, down from 23% in Q4 2012. Import tariffs or export caps coupled with falling subsidies will affect China's Trina Solar (NYSE: TSL) as well. In 2013 Germany is expected to record just 19% of its sales, down from 33.1% in 2012.
Yingli's finances are already on weak footing. Europe will only push the company further into the red. Yingli's balance sheet is full of debt with a total debt to equity ratio of 8.68 and a current ratio of 0.8. Low costs simply are not enough. In Q1 2013, its overall non-silicon cost fell to $0.47 per watt, and its overall silicon cost fell to $0.13 per watt, but its gross margin was just 4.1%.
Trina Solar is in a better position than Yingli, but not by much. Trina Solar is stuck with a Q1 2013 overall gross margin of 1.7% and an operating margin of -15.4%. The good news is that its total debt to equity ratio of 1.59 is manageable.
The Other Side of the Coin
While China is stuck in the middle of Europe's mess, American manufacturers like First Solar (NASDAQ: FSLR) and Sunpower (NASDAQ: SPWR) are a different story. Around two thirds of First Solar's potential booking opportunities are found in North America and Latin America. The rest of its opportunities are focused in the Asia Pacific region and the Middle East. Europe already plays a relatively small role in the company, and Europe's falling subsidies will have a comparatively small impact.
Sunpower is focused on North America and it is poised to grow, as more of America reaches grid parity. In Q1 2013, it generated $423.3 million in revenue from the Americas, while Europe, Middle East, and Africa generated $68.7 million in revenue. In the past the company has been criticized for being overly focused on the Americas, but now this strategy is paying off.
Not only will Europe have little impact on First Solar, the company is already on strong financial footing. Its return on investment (ROI) of 9.9%, gross margin of 32.9% and profit margin of 11.4% place it profitable territory. Its debt is almost non-existent with a total debt to equity ratio of 0.15.
SunPower's financials are not as strong as First Solar's, but the company is working to improve its situation. Its gross margin of 14.6% shows that it has more pricing power than many Chinese manufacturers, but its ROI of -22.7% and profit margin of -13.3% need to improve. Thankfully, its partnerships with the Japanese firms Toshiba and Sharp have allowed it to gain a strong foothold in Japan.
Even if the European Union only places minimum prices and quotas on Chinese panels, this will be a negative force on Chinese manufactures. It will take away their pricing advantage and leave Yingli and Trina Solar exposed to more competition. First Solar and Sunpower are more attractive investments with better margins and less exposure to Europe's troubles. Right now Sunpower is far away from First Solar's profit levels, but Sunpower's high reliability should help it to regain some its pricing power.
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