Was Buffett's Solar Deal Any More Opportunistic Than The Last One?

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On Wednesday, SunPower Corporation (NASDAQ: SPWR) soared on news that MidAmerican Solar, a Berkshire Hathaway (NYSE: BRK-B) subsidiary, had purchased the 579-megawatt Antelope Valley Solar Projects (AVSP). The news shot the stock of the struggling solar module market up over 40% on Thursday.

The real question is whether or not the news is actually bullish for the solar industry in general and SunPower in particular. Luckily for investors, the group owned by famed investor Warren Buffett made similar deals with FirstSolar (NASDAQ: FSLR) at the end of 2011. Any investor might want to review how that turned out for the shareholders of that stock before plunging into this latest solar hysteria.

ASVP deal details

The current project actually involves two co-located projects in Kern and Los Angeles Counties in California. The two combined projects will form the largest permitted solar photovoltaic power development in the world.

SunPower has been developing this project on 3,230 acres over the last four years. The SunPower Oasis Power Plant product will be installed as it uses high-efficiency solar panels designed to track the sun and to be rapidly deployed for utility-scale solar projects.

SunPower will act as the construction contractor and operate and maintain the facility via a multiyear services agreement. Construction is scheduled to begin in Q1 2013, with the plants expected to be complete by year-end 2015.

AVSP will provide renewable energy to Southern California Edison (SCE) under two long-term power purchase contracts.

Reuters suggests the deal is valued between $2.0B to $2.5B for the installation and related services contracts. The analyst from Raymond James probably summed it up best saying the monetization of the projects “does not alter the fact that SunPower retains a markedly high-cost structure and razor-thin margins in the context of a massively oversupplied market.”

FirstSolar project

Back at the end of 2011, MidAmerican bought two solar plants under construction using FirstSolar panels: the 550-megawatt Topaz Solar Farms in San Luis Obispo Country, CA, and a 49% ownership interest in the 290-megawatt Agua Caliente solar project in Yuma County, AZ.

Those deals initially sent the stock of FirstSolar soaring. The stock went from $30 to $50 within two months of the deals. While other issues likely contributed to the surge in stock price, the real takeaway is that the stock plunged throughout 2012 to start June in the $11 range. It dropped nearly 80% off those early 2012 highs.

The purchase from Buffett’s group quickly went from a signal of a rebounding sector to a sign of weakness. As usual, Buffett made an opportunistic deal that benefited his company and not so much the vendor. In essence, Buffett suggested investors should be buying utility grade solar farms being partly funded and subsidized by the government. Notice he didn’t buy the stock of FirstSolar and he isn’t buying the stock of SunPower in this latest deal.

Stock price/valuation

Even with a market cap of only $1B, this solar stock is difficult to own. It isn’t often that a company of that size scores $2B+ deals, but this industry is unique in the ability to add capacity and sell product below cost.

Analysts expect revenue of nearly $2.6B in 2013. It isn’t apparent that this deal changes those figures as the project was already in the works. Also, analysts only expect a meager $0.21 profit based on that sales figures. If anything, the fact that a Buffett group was the apparent high bidder suggests those profits have to be in question now.

Conclusion

Considering the market situation in the solar panel sector, one has to almost assume that MidAmerican got this plant on the cheap. Investors appear to be making the same mistake they did with FirstSolar more than a year ago. The deal, while exciting in the context of a large and consistent revenue base, has the makings of a razor-thin margin contract. Anybody thinking a Warren Buffett company would make a deal otherwise isn’t paying attention.


Mark Holder and Stone Fox Capital Advisors, LLC have no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. 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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