Will the Sun Continue to Shine on Solar Power?

It was a very good year for investors of solar panels manufacturers such as SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR). These companies have had an excellent year in the stock market. Will these companies repeat this staggering performance in 2014? Is it still worth entering this market? Let’s start by examining the recent developments in the solar energy market.

Always the Sun

The solar industry is a growth industry that has sharply expanded in the past year. The Energy Information Administration projects the U.S solar demand has increased by over 32% during 2013. Moreover, according to the Solar Energy Industries Association, during the first nine months of 2013, there was an 18% rise in installation of photovoltaic (PV) capacity in the U.S. Despite these high numbers, leading solar manufacturers didn’t augment their revenues by similar rates. SunPower’s revenue rose by 7.5% during the first nine months of 2013. On a yearly scale, SunPower’s management estimates its annual growth in sales will only be around 2.4%. First Solar’s net sales grew by nearly 11% in the first three quarters of 2013. The management [l2] has recently revised down its 2013 annual guidance and estimates its revenue will rise by only 4% and not 10% as it initially projected. So even though this industry is growing fast, these companies’ revenues didn’t rise at such a pace. Based on the recent update of Solar Energy Industries Association, one reason is likely to be the ongoing drop in solar panels prices, which have tumbled down by 60% since early 2011.

For 2014, EIA estimates that U.S solar energy consumption will increase from 0.309 quadrillion Btu in 2013 to 0.418 quadrillion Btu, which is roughly a 35% growth in consumption. In comparison, total renewable energy consumption is estimated to rise by less than 3% during 2014. Thus, solar energy is expected to be the fastest growing renewable energy source in 2014.

The U.S government’s decision to reduce CO2 emissions by enforcing fines and additional environmental costs on utility companies is likely to also shift companies such as FirstEnergy (NYSE: FE) towards purchasing or generating renewable energy. Currently, renewable energy accounts for only 11% of FirstEnergy’s fuel mix. Similar environmental restrictions are also enforced on a State level; e.g. last year, FirstEnergy sought out solar generated power in order to meet its renewable energy requirements in Ohio. Therefore, the support of U.S policymakers on a federal and State levels is likely to fuel the demand for solar energy. Despite the little growth in sales of leading solar manufacturers, their profitability rose.

Profitability is improving

During the past year, SunPower and First Solar were able to widen their gross profitability: SunPower’s gross profitability rose to 26.5% in the first three quarters of 2013. Back in 2012, its profit margin was 24.4%.  First Solar also improved its profitability from 12% in 2012 to 19% in 2013.  These companies have also increased their net earnings partly due to a reduction in SG&A.

Furthermore, for SunPower , the sharp rise in revenue in the Americas and drop in sales in EMAE also widen its profit margin. Despite these developments, the fall in the price of solar panels, as stated earlier, could also adversely affect these companies’ profitability down the line.  The improved profitability has increased these companies’ valuation. Let’s examine how these companies are priced compared to the industry average.


In order to analyze these companies’ valuation I have calculated their enterprise value and EV-to-EBITDA ratios. The table below shows the summery of data of SunPower and First Solar and the average power industry.

valuation solar power Jan 2014

Source of Data: Yahoo Finance and Damodaran’s site

The EV-to- EBITDA ratio considers these companies’ different financial structure including their level of debt and cash on hand. E.g. SunPower’s debt burden is much higher than First Solar’s:  SunPower’s debt-to-equity ratio is 0.94, while First Solar’s debt-to-equity ratio is only 0.05. This means, SunPower’s financial risk is higher than First Solar’s and endures higher interest costs.  As you can see, both companies’ EV-to-EBITDA ratios are very far off form each other and from the industry average. First Solar’s ratio is only 4.72, while SunPower’s ratio is over 27. In comparison, the power industry average is 9.8. The wide gap between these companies’ valuations is because SunPower’s stock jumped by nearly 300% in 2013, while First Solar’s stock by “only” 80%. These factors suggest, at face value, that First Solar’s current valuation is low compared to SunPower’s and the industry average, which makes First Solar a better priced investment.

The bottom line

The expected rise in the demand for solar power is likely to fuel the increase in revenues of solar manufacturers. If you were to consider entering the solar power industry, it seems that First Solar might be a better fit in terms of valuation, growth in sales, profitability, and financial stability. But keep in mind that the ongoing drop in the price of solar panels is likely to cut down these companies’ profitability, which could reduce their valuation down the line.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.