The solar energy industry is going through a lean patch due to macroeconomic headwinds. Countries have been curbing subsidies to have a check on their fiscal deficits and debt. This has affected the solar-energy industry the most, as it is in a nascent stage and requires a lot of capital expenditure to carry on research and development to reduce the cost of panels.
Also, the cost associated with the production of equipment is very high and if subsidy is not provided, there will be no takers for solar products. I believe , as the macroeconomic conditions revive, and we do have a few positive indicators of that, once again the focus will shift to utilizing this renewable source of energy. I have picked three companies in this segment, which have strong fundamentals and will gain the most in the improved macroeconomic conditions.
Global expansion and new sales offerings will drive growth
SunPower's (SPWR) second-quarter results were above expectations. The company raised its full-year guidance by 50%. The strong performance of the most recent quarter can be attributed to higher revenue from all geographies , especially the European region, cost-reduction measures and strong capacity utilization.
The demand for solar-based electricity generation is increasing worldwide. I expect that there will be increased demand for the leasing business of SunPower in the coming years. The company has also rolled out plans to introduce solar-home loans. This will complement its residential leasing market. The decrease in the price for solar panels in the last three years and local and federal tax benefits will also fuel the demand for solar panels.
Growth in the international market will help the company diversify its revenue and profit margin . In recent times, the company announced plans to expand its leasing program in France and other countries. This will help it spread its fixed costs . So I expect the EBITDA margin to increase from the current 3.2%. The cost-cutting measures undertaken by the company are also ahead of schedule and will also support the margin increase in the coming quarters.
The company's EV/EBITDA is ~37.8 and EV/Sales is ~1.1. With low debt of $998.5 million and with a debt-to-equity ratio of 1.0 on its books, the company can increase its financial leverage to meet its capex requirement and increase FCFE as interest rates on debt are comparatively low due to subsidies.
Expansion in global markets will reduce the pressure on revenue
First Solar (FSLR) has given a return of 140% in the last year as compared to Nasdaq's 23% return. The company has been successful in getting major traction from the overly crowded U.S. market . Based on the project pipeline and an expansion in global markets, I am bullish on this stock.
The company has signed three deals in Mexico and one in Australia. The company will provide engineering, procurement and construction services using thin-film photovoltaic modules for construction of three solar power plants with a combined capacity of 23 MW. The company has also signed deals with AGL to provide engineering and construction services for power projects in Australia.
The settlement between the EU and China to settle the price at ~0.77 euro/watt will negatively impact First Solar. I expect that the EBITDA margin will come under pressure in the short term as a result of this.
The company's EV/Sales is around ~1.1x. Due to the pressure from the EU and China settlement, the company's shares may face some headwinds in the near term. However, its long-term outlook remains positive given increased traction in the U.S. market, an improving deal pipeline and expansion in the global markets.
EU-Chinese settlement and initiative by China will act as catalysts
JA Solar (JASO) has given a return of 101.9% year-to-date. The company will benefit from the settlement between the EU and China over solar products. In addition to this, China's decision to inject additional capital into solar will benefit JA Solar. I believe that the company will beat the consensus estimates in this quarter too.
In addition to the settlement between the EU and China, which will help the company to stabilize pricing and provide better forecasts for revenue and margins, I expect that JA Solar will benefit from the demand from Japan and other emerging solar regions. Recently it has announced that its multi-crystalline silicon efficiency has reached an industry leading conversion efficiency of 18.3%. This will help the company gain new customers and can enable it to charge a premium for its products over its competitors.
The company's management has announced that JA Solar is looking for high-margin markets with better pricing. I am encouraged by this news. The company has scaled back its EPC and project business in China where the spot price is ~$0.40/W. I believe this will help in turning company's EBITDA positive in the coming quarters.
The company's EV/Sales is currently 0.7x. I believe the company's EV/sales will improve in the coming quarter to 0.9x.
The solar industry has experienced a lot of pain due to the subsidies reduction, which had hampered market growth in the recent past. However, I believe that capital investments are starting as the economy recovers. If we look at the fundamentals of the above-mentioned companies, they are very strong. Once the solar industry is revived these companies will be the major gainers. So, I suggest buying these stocks for the long term.