Rethinking Solar's Still Bright Future

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

Since I have been writing for several crowds - none nearly as fun as the Foolish - I have had the opportunity to talk to quite a few well-connected people in energy, solar in particular. Those talks and the resulting research has shed some light on my views of solar. Long-term, as I have discussed, I am still bullish on the Guggenheim Solar ETF (NYSEMKT: TAN), however, for those of you looking for something a little more targeted, I think an addendum to the solar story needs to be added.

While it is difficult to pick out winning and losing solar panel companies, hence why I opt for the ETF, analyzing where we are in the gradual build-out of solar energy might be easier to analyze. Currently, many solar panel companies are struggling as plunging costs and margins are wreaking havoc on company's business models.  Several companies have already folded and several more will. There are also a few Chinese companies that by all rights are insolvent, LDK Solar (NYSE: LDK) with billions of debt and no free cash flow comes to mind, but the support of the Chinese government keeps them afloat. 

There is good and bad in the massive support of the solar industry by China. Clearly, that support has directly resulted in the downward pricing pressure on the cost of solar panels.  That is good for all of us.  However, the Chinese supports have also skewed the playing field for solar panel companies globally.  World Trade Organization complaints against the Chinese are pending from disgruntled American panel makers, though they have little support from other players in related solar industries.

One group of solar companies to be aware of are companies with EPC capabilities (engineering, procurement and construction) for solar projects.  With installations, particularly utility scale and commercial leading the way, still humming along at 25%-35% annually, solar companies that can participate in the build outs stand to gain- big.

Pure play panel companies face a much more challenging road.  Many of the pure play panel companies either need to be merged into companies with EPC capabilities or develop that expertise, or possibly go the way of Solyndra and Evergreen. Already we know that General Electric (NYSE: GE) is entering solar in a big way and might be a suitor for a few panel makers.  Unfortunately for shareholders of panel makers, GE or other suitors, might just wait for bankruptcies to buy capacity, rather than bid up shares.

Among the large vertically integrated solar companies with both panel businesses and EPC expertise are First Solar (NASDAQ: FSLR) and MEMC Electronics (NYSE: SUNE)

First Solar is a leader in building utility scale solar projects using thin film panels.  Recently, Berkshire subsidiary utility MidAmerican bought capacity from First Solar.  First Solar shares have been on a slide down with the rest of the panel group and might yield a buying opportunity.  Several analysts have recently reaffirmed their outlooks and shares seem undervalued long-term based upon their analysis.

MEMC Electronics manufactures polysilicon, builds panels, and integrates, installs and finances solar projects globally.  Insiders have bought shares recently at what they apparently consider depressed prices.  I have too.

Of note, the Guggenheim Solar ETF has large positions in both MEMC Electronics and First Solar, and also a position in LDK.

If you believe in the long term adoption of solar for at least peak power production, which it is already at or near grid parity, knowing which companies have viable EPC units is a must.  Investing in a few companies that can build and install the larger solar projects might be your ticket to a sunny future.  


Kirk and clients of Bluemound own common stock shares of MEMC Electronics and General Electric, as well as, long option positions in those companies.  Neither Kirk nor Bluemound clients have made any transactions in the previous 3 days or plan any transactions in the next 3 trading days in the mentioned company's securities. Opinions subject to change at any time without notice. Follow Kirk on Twitter @GALPinvesting or see his watch lists at www.GalpInvesting.com.

Motley Fool newsletter services recommend First Solar. The Motley Fool has no positions in the stocks mentioned above. kirkydu has no positions in the stocks mentioned above. 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.

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