Why This Solar Stock Might Present a Bargain

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

The biggest challenge for solar power companies has always been to reduce costs and attain sustainable profitability. SunPower (NASDAQ:SPWR) has yet to achieve this goal, but it is making strategic moves to improve its future potential. 

SunPower's strategic moves

In late June, President Obama announced his Fresh Climate Change strategy, with a focus on reducing emissions from coal plants. SunPower's stock appreciated approximately 20% over the next month, alongside similar gains in other U.S. solar players. However, the stock has since retreated back to the same level it traded at prior to the announcement. 

SunPower also recently partnered with KB Home to produce 1,500 solar-powered homes. KB Home and SunPower recently celebrated their 1,000th home and nearly $1 million in annual savings for solar-panel users.

Altogether, SunPower supplies seven homebuilders in the United States, which has led to 10,000 new homes with solar panels over the past two years. By the end of 2013, 20% of new homes in California are expected to have solar power; SunPower currently owns 80% market share for solar homes in the state. SunPower also offers 0% down financing to expand the reach of its third-party ownership finance model.  

Total's backing of SunPower also plays a major role in SunPower's potential. This relationship has led to lower borrowing costs for SunPower (saving between $1 million and $10 million per contract), and a strong possibility for Middle East and Africa expansion thanks to Total's ties. Total wants to bundle fuel contracts with solar panels, and it sees a potential new market in the mining industry, where solar can be used as opposed to diesel. 

SunPower expects FY2013 revenue of $2.5 billion to $2.6 billion, and net income per diluted share of $1.00 to $1.30. The company also aims to achieve the following goals by 2015: 

  • Double its customer base
  • Improve panel efficiency 10% to 23%
  • Decrease cost-per-watt by 35%
If SunPower CEO Tom Werner is correct about photovoltaic panels becoming a standard for new home construction, then doubling the customer base will be easy. That type of growth would then lead to increased cash flow, which could increase R&D, and then lead to finding ways to improve panel efficiency and reduce those panels' cost per watt. Based on the company's success in California, this could become a reality.

SunPower has already spent a lot of time and money on R&D, with a focus on solar-panel efficiency. As a result, SunPower's solar panels convert as much as 24% of sunlight into energy -- which represents up to 50% more than conventional panels. 

First Solar is also making strategic moves

When it comes to strong upside potential, rival First Solar is often brought up along with SunPower. However, the two companies have many differences, which may give one stock more potential than the other. 

First Solar now offers several services in addition to just solar panels, including utility-scale generation, industrial power, and fuel replacement. This kind of diversification may limit its downside potential if the solar industry weakens. 

As part of its broadened efforts, First Solar is set to construct New Mexico’s largest solar plant, and it will supply 50 megawatts of solar power to El Paso Electric for the next quarter-century. This deal will add 300 construction jobs, provide clean energy to 18,000 homes, and displace more than 40,000 metric tons of CO2. 

First Solar displays strong management, and it's impressive compared to peers on several key metrics:

Metric 

SunPower

First Solar

Suntech

Net Margin

          (9.00%)

          11.37%

          (44.18%)

ROE 

          (23.44%)

          11.98%

          (86.50%)

Debt-to-Equity Ratio

            0.93

            0.15

             2.82

Source: Company filings.

Net margin is a good indication of strong management. ROE is often the first metric looked at by investors, as they want to know how much a company profits with the money they invested. As far as debt goes, if the economy happens to falter, then its quality debt management will likely allow First Solar to weather that storm better than most peers. SunPower's debt-to-equity ratio is slightly higher than the industry average of 0.6, but it's not overly concerning. 

Extremely high risk  

If you think SunPower and First Solar are high-risk, then you haven't seen anything yet. If you would like to attempt to hit a 300-foot home run with a Wiffle Ball bat, then perhaps Suntech (NYSE:STP) is for you. 

Suntech is a Chinese-based solar company with many problems. Earlier this year, it defaulted on a $541 million bond payment. This was after the Chinese government cheered Suntech to be a future leader in solar power. SunTech has also been hit by anti-dumping tariffs against Chinese solar companies in the United States, and Europe might be soon to follow. Furthermore, SunTech hasn't been consistent releasing quarterly reports, and it's always close to not meeting NYSE compliance. 

Suntech intends to restructure to improve its balance sheet and operations, but because of the reasons listed above, the odds of this company making a successful turnaround and outperforming the aforementioned peers over the long haul are very unlikely. SunPower's stronger management, partnerships with homebuilders, and financial backing from Total all give it a big advantage over Suntech.

Conclusion

Unless you’re looking to increase your odds of a premature heart attack, you might want to consider avoiding Suntech. First Solar and SunPower, however, are both on the right track. That said, investing in these stocks isn’t for the faint of heart. 

The best way to play this is to commit a small amount of capital to to SunPower or First Solar, and let that position sit for a very long time. Try not to look at the stock price often. Doing so may lead to overconfidence or frustration. 


Dan Moskowitz 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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