Clean Energy: To Play or Not to Play?

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

When several prominent solar companies soared in 2011, the stage was set for the entire clean-energy group to explode. Investing in sustainable energy seemed like an alluring way to make a profit: not only could investors contribute to creating a sustainable environment for the future, but they could gain potential returns on their investments in the meantime. It seemed as if it was only a matter of time before winners -- those who could develop both cheap and sustainable sources of energy -- would emerge.

While not all clean energy companies profited as rapidly as many investors hoped, or even survived, several companies did indeed surface. The first was First Solar (NASDAQ: FSLR), an Arizona-headquartered leading manufacturer of solar modules. The company provided an edge over its competition in that it had attained a manufacturing cost advantage by utilizing a proprietary method based on cadmium telluride (CdTe), a semiconductor material, whereas competitors in the market use silicon. This advantage allowed for First Solar to grow at a more rapid pace than its peers.

In addition, First Solar is a competitive clean-energy player on both qualitative and on a quantitative bases. Primarily, the emerging economies – which are driving an increasing demand for clean energy – display the most optimal environment for the CdTe to thrive. Countries such as India, Australia, and Chile, which all display hot and humid weather, display ideal environments for CdTe. This is because CdTe doesn’t lose as much power as the temperature increases in silicon, which loses voltage at a faster rate as heat levels increase.

In addition, in the near term, First Solar may likely benefit from a significant backlog of projects in the US that have not yet been sold, which could provide a fairly noteworthy upside to revenue over the next few quarters.

Competitive landscape

Two of First Solar’s primary competitors in the clean energy space are MEMC Electronic Materials, which recently renamed itself to SunEdison (NYSE: SUNE) -- a silicon-wafer and solar wafer manufacturer headquartered in Missouri, and SunPower (NASDAQ: SPWR), a solar-products company that makes and distributes solar-electric systems.

To begin with, SunEdison is currently broken into two segments: solar energy and semiconductor materials. Solar energy is the driver behind all large-scale solar energy projects, and the latter supplies raw silicon wafers to the semiconductor industry. However, given the fact that companies like First Solar are pioneering the way in emerging economies thanks to its CdTe technology, over the long term, it does not appear that SunEdison holds a significant competitive advantage.

In addition, in April 2012 the company said that it would restructure itself, and since then the company has reduced its workforce by 20% (1,400 employees). The subsequent consolidation of the company from which it has not yet emerged ultimately successful from one year later does not signify that it represents a buying opportunity at this time.

Another of First Solar’s primary competitors in clean energy is SunPower, a manufacturer of silicon-based solar panels, roof tiles, and crystalline silicon photovoltaic cells. The company, based in Silicon Valley, derives approximately 70% of its revenue from the Americas. Compared to the other two companies, SunPower’s growth is primarily driven by the performance in both the US and Latin America.

Unfortunately, given that the US government doesn’t offer direct subsidies for solar installations as does the E.U., it appears as if SunPower’s ability to drive significant revenue in the near term and long term is determined upon government support. For this reason and for the purposes of investing in clean energy for the high-growth potential in the future, SunPower should be avoided.

How the clean-energy trio stacks up

To begin with, all the companies are fairly attractively valued in the near-term. Over the longer term, however, it is harder to maintain visibility. This is due to the fact that emerging economies are a significant factor on the performance of the group. In terms of price performance, as of June 10, First Solar is trading at $56.40, SunEdison at $8.07, and SunPower at $21.44. These represent 105+%, 55%, and 70% respective price increases over the last three months.

First Solar’s estimated price-to-earnings ratio is approximately 12x, vs. 31x and 29x for SunEdison and SunPower, respectively, indicating that First Solar is still the most attractive.

Currently, the Street recommendations surrounding First Solar are also the most conservative/bearish, indicating that slight upside would present a large potential upward move in the stock. Overall, given the technologically innovative strides First Solar has made, it remains the most attractive way to invest in the clean energy space.

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Colin Tweel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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