First Solar: Better Than Peers

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ValueMax
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The International Energy Agency stated in its new report that solar power is anticipated to provide roughly 22% of the world's electricity needs by 2050. With solar power providing just 0.5% of total electricity supplies today, the report may bode well for growth in solar stocks. Currently, the International Energy Agency reports that almost 70% of global electricity needs are met by fossil fuels. Coal provides 42%, natural gas, 21%, and oil, 6% with the bulk of remaining demand being met by hydroelectric, 16% and nuclear, 14%. In view of this information, I want to look at the state of the solar energy industry today.

We will begin with First Solar (NASDAQ:FSLR), arguably among the largest publicly traded pure play solar companies, with a market capitalization of just over $1 billion and trading at around $12 per share. Trailing twelve month price to earnings is quoted at 2.96 with a price-to-earnings growth ratio of 0.18. Price to book is a fractional 0.34. First Solar's return on equity is -17.60%. Quarterly year-over-year revenue growth is reported at -17.6% and quarterly year-over-year earnings growth is non existent. Not surprisingly, First Solar pays no dividend. First Solar appears to be on a solid financial footing for the near term, with a debt-to-equity ratio of 26.95 and a current ratio of 2.48. Saudi Arabia's announced a $109 billion commitment to meet one-third of its electricity demand using solar within 20 years. First Solar plans to open a manufacturing facility in the United Arab Emirates to capitalize on this and other projects in the Middle East.

I also looked at Suntech Power Holdings (STP), which trades at less than $2 per share and sports a market cap of around $286 million. This company has no quantifiable price-to-earnings ratio, a price-to-earnings growth ratio estimated at 0.56, a price to book of 0.37 and a negative return on equity of 86.50%. It only gets worse from there with a quarterly year-over-year revenue growth at -53.50% and no calculable quarterly year-over-year earnings growth. Suntech is weak financially with a debt-to-equity ratio of 281.82 and a current ratio of 0.64. Predictably, the company pays no dividend. Suntech could receive a virtual death blow if Europe follows the U.S. lead and imposes anti-dumping tariffs on solar panels.

Yingli Green Energy Holding (YGE) has a market cap of about $418 million and trades at around $3 per share. While no price-to-earnings ratio is available, the stock has a price-to-earnings growth ratio of -0.22 and a fractional price to book of 0.51. Yingli's return on equity is -45.05% and quarterly year-over-year revenue growth is -8.80%. No quarterly year-over-year earnings growth figure is available, as is usually the case when there are no earnings to report. Financial strength is poor with Yingli reporting a debt-to-equity ratio of 211.08 and a current ratio of 0.99. Again, no dividend. SunPower (SPWR) is faring slightly better with a market cap around $561 million and a share price approaching (or receding from) the $5 mark. Trailing twelve month price to earnings is 9.88 and the price-to-earnings growth ratio is -2.28. It also features a fractional price to book of 0.48 and a negative return on equity of 47.06%. Quarterly year-over-year revenue growth is 9.5% with no earnings to support a corresponding quarterly year-over-year earnings growth statistic. SunPower's debt to equity and current ratios are 55.60 and 2.15 respectively. It pays no dividend. Yingli faces the same potential obstacles to revenue growth in the U.S. and potentially the European markets as Suntech.

Trina Solar Limited (TSL) trades at about $6 per share and has a market cap of around $448 million. It does not rate a price-to-earnings ratio and the price-to-earnings growth ratio is -0.22. Like the other stocks reviewed here, the price to book is fractional at 0.39 and return on equity is negative, reported at 9.87%. Quarterly year-over-year revenue growth is -36.50 and there is no quarterly year-over-year earnings figure to report. Financial strength is dismal, evidenced by a debt-to-equity ratio of 102.22. The current ratio is 1.59 and, as expected, no dividend. Trina has the same obstacles to revenue growth discussed in the analysis of Suntech.

The chart below is a compelling visual aide illustrating graphically the decline of the solar industry over the preceding 12 months.

So, what does the future hold for the investor? Some have suggested that solar panels may eventually become a commodity, like wheat, or corn. This would necessitate a change in direction for the equity investor. Possible strategies might include investing in companies that produce the equipment necessary for the production of solar panels, companies that install solar panels or produce turn-key systems, and finally, companies that produce the inverters that convert the direct current produced by solar panels to alternating current, which can be channeled directly to the power grid.

In short, solar power has a future. However, the real money-making opportunities may exist on the periphery. Not every solar panel manufacturer will survive. Picking winners and losers may be a gamble you don't have to take.

A focus on companies that are a vital part of the solar energy equation may, in fact, be more rewarding than a direct investment in solar manufacturers. At the very least, you should consider the logic of such a strategy for your portfolio. Solar will grow! It's just a matter of determining the best approach to take advantage of it.

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

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