Will Solar Companies Survive The Price War?

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Includes: CSIQ, FSLR, SMTGF, SPWR
by: Macro Analyst

Summary

Solar Module prices continued to decline throughout 2016, leading to negative operating cash flows.

Canadian Solar and Sunpower are struggling, SMA Solar and FirstSolar look pretty stable.

High levels of debt might lead to financial turmoil in certain solar companies.

The solar industry has taken another hit in 2016. The popular Guggenheim Solar ETF representing it is down 42.3% year-to-date. The Trump rally didn't help either - since election, a 6.3% loss was added. What are the fundamentals pushing the downtrend and how are solar companies positioned in terms of balance sheet strength?

I am going to look at four pure solar companies with a market cap over 500mln, three of them located in the U.S. and one in Germany:

First Solar (NASDAQ:FSLR) manufactures solar panels and provides PV power plants. Sunpower (NASDAQ:SPWR) designs and manufactures photovoltaic cells, roof tiles and solar panels. SMA Solar Technology (OTCPK:SMTGF) is a market leader for inverters (electronic module needed in solar). Canadian Solar (NASDAQ:CSIQ) manufactures solar photovoltaic modules and provides solar energy solutions.

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Revenue

Except for Sunpower, Q3 has been terrible. Revenue declined year-over-year as well as quarter-over-quarter by 7% up to 46%. Module prices continued its decline throughout 2016, particularly prices for high-performance modules - the ones produced by the mentioned companies. Chinese companies flooding the market with cheap modules are forcing domestic companies to offer discounts - while production cost remains the same.

Q3 15

Q4 15

Q1 16 Q2 16

Q3 16

YoY

QoQ

First Solar

1271

942

848

934

688

-45,9%

-26,3%

Canadian Solar

850

1120

721

806

657

-22,7%

-18,5%

Sunpower

380

374

385

420

729

91,8%

73,6%

SMA Solar

295

342

280

271

253

-14,2%

-6,6%

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Debt and Cash Flows

The question is whether these companies are able to survive the price war. The future demand for solar installation is huge - even if Trump won't support renewable energy - and prices can be expected to rise in the long run. First, however, more companies will have to reduce capacity or leave the market.

in $mln net debt equity ratio cash
First Solar -1303 73.5% 1414
Canadian Solar 1832 17.7% 495
Sunpower 1720 31.1% 384
SMA Solar, €mln -375 49.1% 406
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First Solar has the best financials, followed by SMA Solar (I already mentioned SMA Solar earlier). Both companies have no net debt and a good equity ratio of 74% and 49%, respectively. Canadian Solar and Sunpower have an alarming huge pile of net debt.

Looking at operating cash flows gives us a different picture. While Canadian Solar and SMA Solar were able to generate positive cash flows from operating, Sun Power - despite a good uptrend in revenue - and First Solar were burning cash.

Operating Cash Flows

2013 2014 2015
First Solar 856 681 -361
Canadian Solar 230 265 414
Sun Power 162 8 -726
SMA Solar -3 -37 116
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The table below shows future payments. As data is from the annual report 2015, payments due within a year might have been paid already. SMA Solar has total payments outstanding of around € 230 mln, less than its cash. Canadian Solar and Sunpower seem to have a scary future, shouldn't they be able to reduce debt by generating positive cash flows.

Future Payments
Total 1 Year 1-3 years 3-5 years >5 years
First Solar
Long-term debt obligations 299 38 97 18 146
Total contractual obligations 1617 831 203 86 497
Canadian Solar
Long-term debt obligations 607 0 500 7 100
Total contractual obligations 4032 2168 1619 28 217
Sunpower
Convertible debt, including interest 1269 23 344 41 861
Total contractual obligations 4280 1283 1016 507 1473
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Conclusion

The business environment for solar companies remains very challenging as prices are expected to stay low over the next year. Only companies with few debt and the ability to generate positive cash flows will be able to stay healthy till the solar market lightens up again. Having said that, I recommend to put SMA Solar and First Solar on your buy-list for a upturn of the solar market. As all four companies have a strong correlation (see the chart above), financial turmoil in one of them might drag the others down. That's why you have to wait till the overall market (i.e. the price for solar modules) gets more favorable.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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