Efficiency vs. cost
There’s still a lot of debate over whether efficiency matters beyond a certain point in solar. Clean Power Finance CEO Nat Kreamer, who helps line up financing for residential and commercial projects, thinks that a more efficient panel isn’t worth the cost in today’s market and a standard efficiency product is good enough. That may be true today, but investors also need to think about tomorrow’s market.
Over the last few years it’s become very evident that it’s easier to cut costs in solar than it is to increase efficiency. First Solar, Inc. (NASDAQ:FSLR) once dominated the industry with a low-cost, low-efficiency panel and; it’s now had to buy a solar start-up to get into the high-efficiency market. Even if SunPower Corporation (NASDAQ:SPWR) is making a product that’s more costly and more efficient than the residential market needs, I would rather buy that and bet on rapidly falling costs than on the improving technology of commodity solar panels. Chinese players like Trina Solar Limited (ADR) (NYSE:TSL) and Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE) spend almost nothing on R&D and aren’t likely to increase efficiency more than incrementally in the next few years, so it’s much more likely that SunPower Corporation (NASDAQ:SPWR) will cut costs than increase efficiency.
Profits and balance sheets matter
Even if efficiency doesn’t matter as much as I think it does, investors will want to buy companies that are making money long term. SunPower increased its non-GAAP gross margin to 22.7% in the first quarter of this year and expects to make a profit on a GAAP basis this year as well.
On the balance sheet, there are few companies in solar who are its equal right now. SunPower has $142 million of net debt compared to the billions of dollars in debt for Yingli, LDK Solar Co., Ltd (ADR) (NYSE:LDK), and Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP). Even leading balance sheets of Chinese companies, like those of Canadian Solar and Trina Solar, are loaded with debt, and these companies are losing money rapidly each quarter.
SunPower has a better balance sheet than its competitors, which leads to a more reliable warranty and higher margins.
Foolish bottom line
When you consider that SunPower has a better income statement and balance sheet than its competitors, and has a stronger strategic position both in the upstream and downstream markets, it’s easy to see why I think this is one of the long-term winners in solar. Over the past year, that’s been manifest in the best returns for investors in the industry and, as the company separates further from the pack, I think that trend will continue.
Add on top of all of the factors above that EU tariffs are hitting Chinese manufacturers this quarter and that the Chinese government has said it will allow companies to fail, the result is that there’s a lot of risk investing in Chinese solar manufacturers. I’ll take the safety of investing in a company that has many solid advantages over its competitors, than speculate on who might survive the industry in China and what U.S. shareholders may be left with in the end.
The article 3 Reasons SunPower Will Dominate Solar originally appeared on Fool.com.
Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: Long Jan 2015 $7 Calls on SunPower, Long Jan 2015 $5 Calls on SunPower, Long Jan 2015 $15 Calls on SunPower, and Long Jan 2015 $25 Calls on SunPower. The Motley Fool has no position in any of the stocks mentioned.
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