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First Solar: A Bright Spot In a Cloudy Sector

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

The Kingdom of Saudi Arabia has long been grappling with the notion that its crude oil assets will not last forever. Domestically, when one thinks about renewable energy images of giant, white windmills come to mind. Yet, in any  number of 100 square mile swaths in the American Southwest, enough solar energy falls to provide for current power needs in all of America. Saudi Arabia is even a step above that, as enough solar energy falls on the Kingdom to meet four times the electrical demand for the entire globe.

There are two aspects to keep in mind when looking at solar energy in the United States. The first is how the product is manufactured and the rewards involved in developing, producing, and selling solar cells and panels. Second is the general policy of our country in making solar more affordable than it otherwise might be, and the wisdom of maintaining popular support after failures at taxpayer supported Solyndra and, more recently, Abound Solar. Of course, there are those in Washington and elsewhere who want very much to end all taxpayer support for solar energy. These happen to be the same folks, incidentally, most loudly supporting coal, oil, and gas subsidies, which have been around, unabated, since 1916. Imagine if after a few dry wells all oil subsidies had been cut. That is exactly what we are looking at when budget talks begin.

The reason why these solar energy companies have failed is that their cutting-edge products were also being made in China with far more government support than has ever been contemplated in the American industry. Just in 2010, the Chinese government subsidized its domestic solar companies to the tune of over $30 billion. As these subsidized products were dumped on America, the average solar panel price has fallen 61% since the beginning of 2011, and some 80% over the last five years.

The Obama administration recently upheld steeply increased tariffs on Chinese solar energy products. The tariffs will go into effect once the US and  the International Trade Commission accepts that Chinese subsidies have harmed American manufacturers. The ruling from the ITC is scheduled for Nov 7, the day after this country's Presidential elections. Obviously, the ruling will be too late to help some companies. And the tariffs will only apply to those products manufactured in whole in China. A Chinese manufacturer that wants to get around the increased tariffs clearly can.

The Western country with the most developed solar energy program is Germany. After the Japanese nuclear energy disaster, Germany committed to close its nuclear facilities and ramp up its solar power industry. This is a country that receives long snowy winters, and whose year round weather resembles the Great Lakes area of the United States. Right now its solar industry supplies about 25% of the country's energy portfolio. It does this with a combination of small, home roof systems and larger, ground-based systems. It bears noting that while solar panels cost about the same in both the United States and Germany, a home roof system costs about half as much in Germany due to its far lighter regulatory burden.

The United States has recently taken a decidedly positive step toward large scale solar installations, designating large swaths of public land in the American Southwest for solar arrays. This sort of federal support was sorely needed, and I would hate for a new administration to reactively repeal this step and instead support drilling in lieu of clean energy on public lands.

The largest publicly traded solar energy stock based in the United States is First Solar (NASDAQ: FSLR). Its thin film design had already given it some cost advantages over its peers. Rising tariffs on imported competitors will certainly be of help. During the halcyon days a few years ago, before subsidized Chinese built products were dumped on the market and before the European economy went into the tank, First Solar was an analyst darling and its stock peaked at over $300 per share. A lot of people were burned as the stock fell from that point, but there are clear signs of recovery.

First Solar's stock has bounced over 40% this year. It has done this, and turned around earnings to boot, by refocusing the company to be less reliant on individual end user purchases, and instead focus on utility-scale systems worldwide. One such project was just completed in sunny Western Australia, and others are well underway in the American Southwest.

Earnings wise, First Solar benefited in the second quarter from being able to count the revenue expected from projects currently still under construction. This is a company I want to succeed. I will write about it from other perspectives after third quarter earnings are released in late October. Suffice it to say, with its current 5 year PEG at 0.20, this is a fine investment opportunity.

California-based Sunpower (NASDAQ: SPWR) has had its own troubles, but still stands out as a technical leader. It reminds me how far the industry has come. Twenty years ago, companies where hoping someday to come up with solar panels with at least 10% efficiency. Sunpower has products up to 24% efficient, costing far less than products did ten years ago. Sunpower's financial woes are attributable to Chinese dumping as well.

Sunpower is majority owned by French energy giant Total. Sunpower recently acquired a large minority interest in privately-held Australian Diamond Energy in an effort to diversify somewhat from the solar panel business. Diamond owns some bio gas assets, as well as wind assets. Sunpower's intent is to become a more diverse clean energy company that just a solar supplier. But Sunpower is not profitable now, and is years behind First Solar in turning around its business. I certainly favor First Solar to Sunpower at this time.

China's Suntech (NYSE: STP) is the world's largest silicon panel solar energy manufacturer. But it too has to deal with prices far below what it had expected just a couple years ago, and it therefore is not profitable. Its stock is selling for less than $1 per share, and there really is no end in sight. I can see no reason to invest now in this one time high flier.

One thing about any the energy business is that advancements do occur. No one realized how hydraulic fracking would change the natural gas business ten years ago. There are also impressive start ups in the solar business. One that has caught my attention is privately held SHEC Energy. This Canadian company has the potential to revolutionize the weakness of traditional solar energy: storage of energy for when the sun is not shining.

The sun is the most efficient energy source available to mankind. I am obviously a fan of the solar energy industry and want it, particularly the American part of it, to succeed. I am highly confident that as time moves ahead and technology advances, more efficient panels and lower prices will make solar affordable to almost anyone. I look forward to that day, and hope there is an American manufacturer or two to take advantage of that future world.

Interested in Additional Analysis?

Investors and bystanders alike have been shocked by First Solar's precipitous drop over the last twelve months, and now the stakes have never been higher for the company. Are they done for good, or ready for a rebound?  If you’re looking for The Motley Fool’s recommendation on how to approach investing in First Solar, along with continuing updates and guidance on the company whenever news breaks, the Fool has created a brand new report that details every must know side of this stock. To get started, just click here now.

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