Solar's Exile to Green Fringe Ending?

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

I only mention this because the industry was particularly hard hit when the global economy took a beating. With all the problems in Europe and subsidies drying up the solar industry suffered massively. For classic silicon wafer makers, the massive expansion in production capacity and raw material capacity put severe pressure on the industry as supply boomed and demand lagged. Chinese solar companies like LDK Solar (NYSE: LDK) spent a lot of money to create capacity for polysilicon, but there ended up being too much polysilicon out there. With the raw material burning a hole in its pocket, and then a slowdown in panel sales burning another hole the company has taken a thrashing.

The company has not gone under with its massive debt load yet, but I would stay far, far away from LDK. It is losing money along with having a massive debt load. If you feel a pressing need to invest in a Chinese solar company you can consider JinkoSolar (NYSE: JKS), but there are numerous problems with investing in Chinese companies that make me want to avoid them. There is a lack of transparency and the state holds a bit too much sway with the companies. Jinko just got a state-backed loan of $1B to finance some projects. It is safe to assume that the government will have some sway with the company. If those projects do not bring substantial sums into the company, then Jinko will join the slew of Chinese solar companies with too much debt.

However, the technology itself is progressing well. The main problem of costs and efficiency is being tackled whole-heartedly. The Chinese companies are doing their best with middle of the road silicon panels. First Solar (NASDAQ: FSLR) is making breakthroughs with its thin-film panels. Companies like SunPower (NASDAQ: SPWR) are working on high efficiency monocrystalline silicon panels. The Chinese companies lean more heavily on scale, cheap labor, and cheap materials. First Solar and SunPower have to go with technological advantages.

With efficiency increasing and costs coming down, solar might not have to rely heavily on government subsidies. Government incentives can still be offered due to the environmental benefits of solar panels, as well as the potential to require less power plants to be constructed.

The culling of the field in solar strikes me as just the shock the industry needed to shed all the bad habits it picked up when it was an emerging technology being promoted by governmental good intentions. Subsidies can create a culture that allows for inefficiencies since the harm from them is defrayed by government assistance.

After the forced torture inflicted on all these companies, the ones that survive are expected to be stronger. That is another reason I would avoid the Chinese companies. Government assistance continued for those, while their western counterparts had to right their own ships. First Solar is finally posting positive EPS numbers. While the ttm measure is still extremely negative the last two quarters have been positive. SunPower also seems to be headed for a positive EPS ttm, but it is not there yet. First Solar is profitable, which is why I think it seems like a good idea to take a small position here. It is already up a lot over the last few months, so I would start by being cautious. If positive signs continue I would increase my position.

First Solar also sports a low debt-to-equity ratio at 0.1532, which is good for production expansions, innovation, and securing large projects. First Solar has also had some interesting deals, including the one in the Emirates. Thin film solar cells do not suffer a loss of efficiency from increases in temperature like silicon panels do, which is a useful attribute when the project is in the desert.

Thin films are not without issues. The efficiency is so much lower, and the cost is not that much lower. If SunPower can bring down costs and bring up efficiency it will grab a piece of the market where thin films simply will not do, and from less efficient panels. House roofs tend to have limited space so the most efficiency for the most space is required, and SunPower has the advantage there.

First Solar uses cadmium-telluride, while SunPower uses monocrystalline silicon. As I mentioned earlier with LDK, there is a lot of supply for silicon now, and that could lower production costs for SunPower. Though, LDK uses polysilicon, but the difference comes down to purity and the processes used. Also, LDK invested heavily to give itself silicon production capacity, and that hurt it.

If thin films continue to lag in efficiency they could fall into relative obscurity, and be used only where its resistance to high temperatures is required and space is not an issue. If SunPower panels could be produced at a lower cost and thin film panels do not see cost reductions as significant, then SunPower's style of panels would be the choice as long as temperature is not an issue. I would be keeping an eye on developments for silicon panels in case it poses a threat to First Solar's product. I am not saying these developments will occur, but they are significant and possible so worth watching out for.

Currently, both companies have their niches. First Solar is good when space is not an issue, and SunPower is good when space is an issue. It might be prudent to take a split position in both, and choose only one if one of the technologies becomes dominant, or treat them as complementary investments instead of competitive ones. I would have gone with SunPower, but after the Buffett deal the stock might be a bit hot. Any company worth investing in is probably too hot. I might wait with puts, and I would avoid the Chinese companies based on fundamentals and transparency issues.


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