- YieldCos represent innovation, income and price appreciation potential.
- First Solar and Jinko Solar are prime candidates to spin off Yieldcos.
- Macro solar costs are declining while installations and EPS are growing.
Stale dividend returns from utilities, MLPs and overly familiar blue-chip names have been leaving few new places for the income-seeking equity investor to turn.
The more frequent debuts of "YieldCos," or yield companies, however, offer an innovative spin for those seeking income while presenting unusual share appreciation potential.
Energy companies sometimes package existing power projects into new subsidiaries whose revenues stem from long-term power purchase agreements with utilities. The practice is not new. Most of the cash in these subsidiaries is released to shareholders through regular dividends, hence the YieldCo name.
What's new is the use of YieldCo models to help finance renewable energy projects such as solar and wind.
At least two more solar companies have said they are contemplating a spin-off of some of their assets into YieldCos, and such a move could bring a windfall for shareholders.
The two companies, First Solar (NASDAQ:FSLR) and Jinko Solar Holdings (NYSE:JKS), are promising growth vehicles regardless of their final YieldCo decisions, so that investing in them is not an all-or-nothing gamble.
Solar companies still must contend with the lingering bad publicity of the Solyndra debacle, with its political backdrop and the eventual crack-up of that government backed cell manufacturer. That solar companies are often still out of favor with many investors merely creates additional appeal for First Solar and Jinko -- they are not overbought mo-mo plays by any stretch.
What's more, some recent solar YieldCos plays have been highly successful.
For instance, SunEdison (NYSE:SUNE) spun off a Yieldco, TerraForm Power (NASDAQ:TERP), last month in an IPO that popped nearly 35% its first day. SUNE shareholders retain a roughly two-thirds stake in TERP, and TERP can raise money at a significantly lower cost than what SUNE could borrow from a bank. Moreover, both parent shareholders and spin-off shareholders benefit from the fact YieldCos pay out most of their earnings in the form of dividends. And presumably, TERP will continue to buy assets in the future from SUNE at prices that logic says will be favorable for SUNE.
With YieldCos, both First Solar and Jinko should be able to turn what otherwise could be a liability into an asset. Most renewable energy projects do not throw off taxable income for years, because deprecation usually outstrips revenues. However, without earnings or profits, a YieldCo's cash flows and distributions are deemed nontaxable returns of capital to shareholders. Thus, taxes are deferred for as long as 20 years.
Another benefit of Yieldcos is that because they generally own a range of assets, both geographical and technological risk can be spread around.
The macro industry picture also helps First Solar and Jinko. Solar panels cost 60 percent less than they did only two years ago, according to the U.S. Energy Information Association, while First Solar reported Q2 results after the bell last week that included earnings below Wall Street estimates, believed primarily to be the result of installation delays. The next day, the stock gapped lower, then reversed to finish up 3% on heavy volume.
CEO Jim Hughes said on the earnings call First Solar is nearing the end of its decision-making process on whether to spin off a YieldCo, and will announce the outcome before its next quarterly results. Needham & Co. noted FSLR did not trim its FY 2014 outlook despite the earnings miss, and upgraded the shares to a Buy with a $75 price target. Morgan Stanley (Overweight) and Citigroup (Buy) also expressed optimism on the YieldCo front for the company.
First Solar has a P/E (TTM) of 18.23 vs. an industry average 23.50. Its price to sales is 1.92 vs. the industry average 3.86.
The company's projected EPS growth rate for 2015 vs. 2014 is 79.31% vs. a 27.21% industry average. Margins are on the light side, but total debt to capital is only 4%.
Last month, Jinko raised its full-year 2014 guidance for project development from 400MW to more than 600MW after receiving a $225 million investment to beef up its downstream project unit. The company is also building a new plant in South Africa. Jinko is a Chinese company that sells electricity there, but it has a global customer base in the U.S., Europe, Asia and India.
Jinko has a P/E of 13.87 vs. the industry average 23.50. Its price to sales is 0.52 vs. the industry average 3.86.
The company's projected EPS growth rate for 2015 vs. 2014 is 56.04 vs. the industry average 27.21. Margins are on the light side and total debt to capital borders on the high at 68.21%. Analysts overall are neutral on the stock, based on summaries from Starmine and JKS Equity. Jinko has lower production costs, however, than some other solar concerns.
First Solar and Jinko could get a significant lift from YieldCo spin-offs. Even without Yieldcos, they are participating in a secular industry shift globally toward lower production costs, more installations and higher EPS. Like other yield-reliant investments, YieldCos could become less attractive from a sudden spike in interest rates. First Solar may be a stronger investment than Jinko because it has less debt, and is a domestic business, so it is less exposed to currency and political risks. Both companies are medium-term buys pending the outcome of their YieldCo deliberations.