The increasing awareness of the negative environment effects of fossil fuels is considerably increasing the attractiveness of renewable energy sources such as solar energy. The U.S. government has also taken steps to increase the use of solar energy, which has also contributed to an increase in demand for solar panels and positive momentum for solar stocks.
A large part of the solar growth is expected to come from China. The country has built loads of panel manufacturing factories which have reduced panel price and further increased the attractiveness of solar power. According to Bloomberg, China will become the biggest consumer of solar panels in 2013 and new generation capacity will rise 14% to 34.1 Giga watts in 2013.
This momentum is reflected by the good performance of various alternative energy ETFs, especially the Guggenheim Solar ETF(NYSEMKT: TAN). The ETF has dished out an annual return of around 150% followed Market Vectors Solar Energy ETF (NYSEMKT: KWT) with 103%.
SunEdison (NYSE: SUNE) has also benefited from this trend with its silicon wafer technology gaining more market traction. This increasing popularity is also reflected in the share prices of SunEdison which have risen from around $2.7 to above $9 in the last year.
Other than the positive momentum of the entire alternative energy industry, investors have further shown interest in buying the company's stock since SunEdison announced its decision to spin off its semiconductor unit. After entering the Solar Power industry through acquisition in 2009, SunEdison has focused its attention on to the photovoltaic equipment business, which has thus grown over the years. It doesn't make strategic sense for the company to keep both businesses under the same umbrella. Thus investors largely believe that separating the two businesses would mean better prospects for both, and thus divesting the semiconductor business through a partial IPO is one of the first steps in doing so.
Financials over the years
SunEdison's financials have shown inconsistent behavior over the past five years. Its net sales have seen growth since the purchase of its solar business in 2009 with the exception of a 6.8% decline in 2012, which can be largely attributed to a 10% decline in semiconductor sales caused by continued downturn in the semiconductor industry. Operating income of the company has also been inconsistent and the company has attributed the rise and fall in the operating income to restructuring costs over the years. SunEdison has been reporting losses over the past two years, though its losses have greatly improved in 2012.
However, the company boasts a healthy cash position to support its operations as well as research and development. This shows that most of the business problems have centered around the semiconductor division. Therefore, the spinoff of the semiconductor business will bring stability because a review of competitors reveals that the solar power industry is doing well. First Solar (NASDAQ: FSLR) has shown an 5-year average revenue growth of 46% while SunPower (NASDAQ: SPWR) has shown a 5 year-average growth rate of 26%. The fortunes of both companies are affected by the same external environment as SunEdison because all three companies rely on government policies towards renewable energy for growth.
The solar energy market has been at a standstill for the past few years; however, with the growing fossil fuel prices and their adverse environmental impact, there is an increasing trend toward shifting to renewable energy such as solar power. As the chart below shows, all three energy sources have been on a steep rise during the last 10 years. This rise was marred by the global recession which resulted in a steep decline in prices of coal, gas and oil. Coal prices have been in a recession recently but that is due to a number of factors including increasing awareness of negative environmental impact of coal; which further supports the shift to solar.
The photovoltaic unit manufacturers have suffered in the past due to low solar panel prices. Photovoltaic equipment manufacturers greatly expanded their manufacturing capacities in China and Korea, which resulted in an oversupply of solar panels and related equipment in the market, pushing their prices down. However, with the energy market trending toward renewable energy options, the demand for solar energy products is set to rise in the future, and is expected to be on par with the supply in two years, thus benefiting photovoltaic equipment manufacturers.
SunEdison has thus shifted its focus onto its solar energy business due to the current trends in the energy market as well as the future prospects surrounding the solar energy industry. SunEdison currently aims at gaining from the current low prices of solar panels, thus constructing solar farms for cheaper power generation. The company expects growth in its solar power business in the future years and estimates its solar energy systems sales to reach 750-900 megawatts in 2014. SunEdison has currently obtained project financing worth $212.5 million to help build a solar power plant in Chile, which might be the biggest solar farm in Latin America. In addition to that SunEdison has also received $67.3 million from three equity firms to build solar farms in California. Such projects indicate that the energy market is slowly shifting toward solar power, with the market's improving faith in solar power generation, and that the energy industry will see growth of solar power projects in the years to come.
The market has yet to see the financial affects and implications of the semiconductor spinoff of SunEdison; however, the various factors discussed above show that said decision would prove constructive for the company in the longer run.
A combination of expensive fossil fuels and the increasing awareness of their adverse environmental impact have positively affected alternative energy ETFs. SunEdison has also shown a positive momentum (270% rise in last 52-weeks) due to the above mentioned factors and the semiconductor business spin-off. This spin-off can bring more stability to the company and will greatly improve SunEdison as a long term solar energy investment. First Solar and SunPower are also in a position to benefit from the rise in popularity of solar stocks but investors should do their own complete due diligence before investing.