Here Comes the Sun

January 29th, 2015
in contributors

Investing Daily Article of the Week

by Thomas Scarlett

One of the ancillary effects of the collapse of oil prices is that companies that profit from solar energy have seen their share prices decline in recent months. The thinking is that Americans will have less interest in solar energy as they realize that they can provide power to their homes with fossil fuels more cheaply than they had anticipated.

Follow up:

This is a short-sighted approach. Oil prices are inherently volatile; at this time next winter, they could well be on the rise again. The need to shift to renewable fuels is a long-term trend that will continue for decades, and companies that learn to navigate this area successfully stand to make a lot of money.

One of the key companies in this field is SunPower Corp (NASDAQ:SPWR), an integrated solar products company that designs, manufactures, and delivers solar electric systems for residential, commercial, and utility-scale power plant customers.

Solar power companies have had a tough time the last few years. The most spectacular failure was Solyndra, which filed for bankruptcy in 2011 and became the focus of political controversy as Republicans raised questions about loans the company had received from President Barack Obama's Department of Energy.

Also, European governments have been "cutting spending to rein in their ballooning deficits-including on solar power subsidies. This all came against a glut of cheap panels-many from Chinese competitors-which cut prices and profit margins."

SunPower ended 2014 with a strong performance in the fourth quarter. SunPower president and CEO, Tom Werner said:

"Our results reflect the benefits of our superior solar panel technology combined with strong performance from both our rooftop and ground mount teams."

Solar panels manufactured in China typically use "low cost" modules that are cheaper in the initial installation than their American or European competitors. But a recent study found that SunPower offers more cost-effective solar installations if you judge by the cost of energy produced, which is the correct measure to use.

In its power plant business, the company started initial construction of a 579-megawatt (MW) Antelope Valley Solar Projects (AVSP) for MidAmerican Solar and reached 90 percent completion on the California Valley Solar Ranch (CVSR) project owned by NRG Energy.

With installation at CVSR expected to be finished by the end of the second quarter, the company is aiming for full project completion by the end of the year. Demand in the residential lease business remains solid.

Additionally, demand in Japan remains very strong, as Toshiba (OTC: TOSBF) and Sharp (OTC: SHCAY) accounted for approximately 25 percent of total first-quarter shipments.

Historically, one big disincentive to installing solar power systems has been the large initial cost. While private financing is sometimes available through the solar companies, homeowners may balk if they think they will not stay in their home long enough for the investment to pay off.

But cities like Palm Desert, California and Boulder, Colorado are trying to get their respective state governments to change the laws so that solar power systems can be financed like gas lines or water lines, covered by a loan from the city and secured by property taxes.

While trying to expand its presence in the residential market, SunPower has also been adding new projects with large commercial customers.

Given the recent news that the budget deficit is coming down more quickly than expected, perhaps the US Energy Department will tiptoe back into the business of subsidizing the transition to solar power. Europe remains gung-ho about solar, so when national budget pictures on the Continent improve, more assistance could be forthcoming there as well.

SunPower's share price has been on a bit of a roller coaster ride for the past 36 months. The last six months have been on the downside, but the price has risen in recent sessions and has a lot of room on the upside. The price-earnings ratio for the stocks is around 27 - a reasonable valuation for a technology-heavy company in a fast-growing business.

The fact is that no one knows yet how big the potential upside is in solar power. It's by no means a risk-free investment, but the potential for major gains is as high as in any industry you could name.

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