Clean Energy Doesn't Need To Be A Partisan Issue
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the Republican Convention rolls along from Tampa, I wanted to take a look at the alternative energy issue, focusing on the solar area. I want to demonstrate why clean energy does not need to be a partisan issue. It makes all the economic sense in the world to support technologies that minimize tangential and secondary damages that are caused by fossil fuel mining and use, the costs for which are not borne by anyone other than health insurance rate payers and taxpayers in general.
The Solar industry has been dominated by Asian competitors, especially since two of the three biggest domestic solar power companies; Solyndra and Evergreen Solar have been liquidated. This leaves only First Solar (NASDAQ: FSLR) as a large scale, global top ten, American based solar energy company, though it too has seen far better days. First Solar is the only one of the current ten largest makers of solar power systems to record a second quarter profit, in its case, of $111 million, or $1.27 per share, a cool 41% above analysts' expectations, and 69% above last year's second quarter.
The retreat of the solar industry owes to three factors. First, state supported, Chinese makers have grown exponentially, causing an overcapacity glut and crashing the price of solar panels by nearly 50% in the past twelve months; second subsidies in Europe have declined markedly, and the same is likely be happening in the United States; and third, the “cleanest” of the fossil fuels, natural gas has seen its price collapse to the point where it appears to be much cheaper than wind or solar could be. As for the first issue, the United States in May of this year slapped 31% tariffs on Chinese solar panels. Chinese manufacturers sold $3.1 billion in solar equipment in the U.S last year, giving the Chinese an over 50% market share of the U.S solar panel market, so the tariff will help First Solar going forward. But the tariffs obviously end at our coastlines, and cheap Chinese product will still be available in Europe and the rest of the world. The impact of the glut and price crash even had General Electric (NYSE: GE) halt construction on a test solar array it was constructing in Colorado. GE's general manager for solar technologies, Danielle Merfeld, cited a "50% drop in module prices" over a six month period.
The bigger issue goes to the notion of subsidies. The ethanol industry released a study showing that the sum of all subsidies for the oil and gas industries is between $133 billion and $281 billion per year. The coal industry according to a Harvard School of Public Health study receives annual subsidies summing to between $175 billion and $523 billion. These subsidies are just in the gold old U.S.A, and I turn a disdainful ear to claims that clean energy needs to stand on its own economically. How about leveling the playing field and solar and wind would be more than competitive, plus we would save lives as well. In addition, the geopolitical risks of fossil fuel energy would be avoided, and decentralized energy generation lessons terrorist threats.
The only issue for solar is cost, but I will maintain that if we realized the true cost of fossil fuels, solar's cost would be a welcome relief. No less important, if this country would erase the mountain of paperwork involved in a typical, even small installation, the price of a solar system would be affordable to most homeowners and businesses.
First Solar uses a proprietary type of solar panels, based upon cadmium tellurium thin film panels, particularly appropriate for home and business roof lines. But in recent times, First Solar has launched the idea that simply selling panels was not enough; it wants to be more of a full service solar power provider. It has equity interests in various projects in the Southwest desert areas, and more recently, it landed a major project in India as that country looks to augment its existing infrastructure in the wake of recent electrical grid collapses. The cadmium tellurium is not as efficient at energy conversion as other technologies, but it is the most efficient current system, cost wise.
Management looks for First Solar to post earnings of about $4.45 for this year, giving the company a current year price to earnings ratio of just 5.8. It has a five year PEG of 0.22, about the lowest of any company I know. First Solar is not without its risks, as the stock has shown it can take some wild swings. But from today's level, I love this company.
The only other American Solar dedicated company of much size is Sunpower (NASDAQ: SPWR). It is a technology leader, to be sure, and its current offering supply as much as 50% more power per square foot than its competitors. Its systems are modular and scalable, from home roof systems to utility scale. But since going public in 2005 (at $18 per share), profits have been elusive. On a GAAP basis, the company has recorded sizable losses each of the past five quarters, most recently $50.7 million, or $0.71 per share in the second quarter. Even on an adjusted basis, the company has not recorded a meaningful profit since 2010. All the while, cash on hand has fallen to just over $317 million, less than half of where it was at year end 2011 or year-end 2010.
There is the chance for upside here. But there is a nearly equal chance, I believe, of Sunpower failing. Two years from now, the company may have tripled in price if solar power is supported with common sense measures. But if not, it is hard for me to see this company doing anything but continuing to founder.
Chinese giant Suntech (NYSE: STP) is the world's largest solar power panel manufacturer, and uses a more advanced material than First Solar's, utilizing crystalline platforms. Its best known project was the 130kv installation that made up the facade of the Olympic Stadium in Beijing for the 2008 Summer Olympics. Fast forward a few years, we have the U.S tariffs, collapsed European markets, persistent company losses, and most recently, a substantial lawsuit, to the tune of $650 million, alleging accounting irregularities. There is too much going on for me here, and I would not throw any of my money in this direction.
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