Solar Stocks Look to Rally Following Berkshire's Move
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Most stocks trade at a higher multiple compared to their sales. This is of course dictated by industry, as some sectors trade with more optimism. However, the solar industry might be the most undervalued space in the market, and the recent acquisition by Berkshire Hathaway is solid proof.
If you look through most of the high-profile technology companies you will find that most trade with a price/sales ratio over 3.0; most large banks trade over 1.50; and then other industries such as consumer and services stocks trade somewhere in the middle. Occasionally you’ll find a stock that trades with a price/sales below 1.0, but it’s rare, and is more of an exception than a rule.
Solar stocks have the greatest distinction in value compared to any other industry. The markets have pushed them lower for so long that none accurately represent fundamentals; which is why we’ve seen a major bounce in recent months.
Berkshire Hathaway’s acquisition of SunPower’s Antelope Projects was quite a reality shock to the market; showing the level of value being presented. The acquisition will give Berkshire two plants in California that will create the world’s largest permitted solar photovoltaic power development. At the time, we did not know the purchase price, but have since learned that it’s somewhere in the area of $2-$2.5 billion.
Shares of SunPower have since rallied on the news, currently more than 42% on Thursday alone! It’s almost as if Berkshire acquired the entire company. However, that is not the case; Berskshire simply paid a fair price for the plants so that it could further develop them and become the leader in this space. Yet the reason that SunPower responded with such large gains is because of how cheap it traded prior to the acquisition; ending 2012 with a market cap of just over $900 million.
Basically, Berkshire acquired a segment of SunPower’s business for about 150% more than SunPower’s entire market capitalization. Although this may surprise Wall Street, it most likely does not surprise the large undervalued solar company, because this is an industry wide phenomenon. To better explain, take a look at the chart below of companies in the space that saw the greatest reaction to the SunPower news. Then, we can discuss what may happen next.
*over last 12 months in millions **in millions
The most important metric from the above table is the market cap, because that’s what shows the worth of these companies. According to the market, these six companies are worth a combined $5.426 billion. Yet have revenue in the amount of $12.270 billion. Therefore, this is an industry that is trading at less than 0.45x sales! And if it weren’t for First Solar’s 170% gain since June 2011 and the industry wide gains over the last three sessions, the value being presented would be far greater.
So what does this deep value mean for the industry? It means two things: First, it means the potential for large gains is great, and second it means that the potential for large acquisitions is even greater. SunPower was the first, but it most likely won’t be the last, the sum of these companies parts far exceed the worth of their entire companies. SunPower sold just a portion of its business for, most likely, a fair 2-3x sales price to Berkshire. And when these companies are broken down, many have significant value to their segments.
I may be wrong, but I have a feeling that the SunPower deal just opened the door for other acquisitions and also exposed the true value of this space. I think it’s very likely that we see more acquisitions in upcoming months, and I also think it’s a good sign for the industry that Mr. Buffett himself has made three solar PV deals over the last year and his company has the world’s largest solar PV power development. The bottom line: The valuations make the risk very small, but with fund rebalancing and true value being exposed, the upside is quite high for this space.
BrianNichols 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!