SunPower Corporation (NASDAQ:SPWR) inked contracts to build two California solar projects for a MidAmerican Energy Holdings, a subsidiary company of Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A). The company will receive between $2.0 billion and $2.5 billion in revenues for these of 579 MW projects. MidAmerican Energy Holdings will pay SunPower for designing, constructing, and installing the Antelope Valley solar projects.
Construction is scheduled for the first quarter of 2012 and is expected to be completed by 2015. The projects are thought to be the world’s largest photovoltaic power development projects. The projects would sell power under two long-term contracts to the utility Southern California Edison. The plants are part of California’s plan that would reduce emission greenhouse gases by 2020 to 1990 levels. Many more renewable energy projects would be needed to achieve the 2050 goal of an additional 80% reduction in emissions.
Many remain skeptical of SunPower as an investment. According to Raymond James analyst Marshall Adkins, the monetization of projects will not change the fact that SunPower retains a high-cost structure and razor-thin margins in respect to an extremely oversupplied market.
Unfortunately, the competition for building large-scale solar farms for utilities is heating up as more solar companies are jumping into these markets. For example, SolarCity does not manufacture solar panels, but instead helps customers finance and install systems. CEO Lyndon Rive indicated that demand was increasing. According to Rive, “We told investors that we sell energy, not equipment.”
Canadian Solar Inc. (NASDAQ:CSIQ) also plans to extend its operations to building and selling solar farms to utilities. Canadian Solar CFO Michael Potter said, “If you think about it, it’s a long-term bond at a higher yield because it’s an asset that generates income.” Canadian Solar hopes to get about $1.3 billion from the sale of projects being developed in Ontario.
Jenny Chase, Bloomberg New Energy Finance analyst, remains skeptical. She said, “I don’t think it makes sense for them long term – a manufacturer to be an owner of assets – it’s two completely different asset and capital requirements.”
Solar companies are not doing well:
| Ticker | Company | P/E | P/S | P/B | P/FCF | D/E |
| CSIQ | Canadian Solar | NA | 0.13 | 0.13 | NA | 2.56 |
| FSLR | First Solar | NA | 0.89 | 0.89 | NA | 0.15 |
| SPWR | SunPower | NA | 0.54 | 0.54 | NA | 0.74 |
| STP | Suntech Power | NA | 0.11 | 0.11 | NA | 2.84 |
| TSL | Trina Solar | NA | 0.29 | 0.29 | NA | 1.25 |
| YGE | Yingli Green Energy | NA | 0.25 | 0.25 | NA | 4.39 |
Companies do better in industries where free cash outflows and accounting profits are typical. In contrast, each of these solar companies is running a net losses and absorbing cash. (This is the source of the “NA” by their price-to-earnings and price-to-free cash flow ratios.)
All these companies are speculative. When you invest in any of these stocks you are betting that the cash reserves and credit of a company can outlast unfavorable economic conditions. Unfortunately, Yingli Green EnergyHold. Co. Ltd. (NYSE:YGE), Suntech Power Holdings Co., Ltd. (NYSE:STP), and Canadian solar are already financed significantly more by liabilities than by equity. This is precarious.
What about the solar stock with the least debt financing? First Solar, Inc. (NASDAQ:FSLR) has been the target of negative analysis by JPMorgan Chase & Co. (NYSE:JPM) analysts. They cited First Solar as a stock to avoid in 2013. JP Morgan Analyst Christopher Blansett said, “We see the issues currently plaguing the Solar PV industry—significant overcapacity and declining demand in Europe which historically has been the largest market—continuing in 2013.”
Solar stocks are speculative and some of them have traded at lower price multiples in the past. Investors should wait for solar stocks to trade at less than 50% book value with a debt-to-equity ratio under 1 before making a small speculative bet. SunPower is the only stock that is almost priced for such speculation.
The article Green Tech Funding Dries Up originally appeared on Fool.com and is written by Bill Edson.
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