Charlie Munger once commented that humans have to ultimately take energy from the sun. Thus, solar power is the future of energy. Although many companies are trying to extract energy from the sun, not a lot of them are profitable. Among the U.S. solar companies, I noticed one which has experienced huge volatility over the past five years.
North America contributes most of the revenue
First Solar, Inc. (NASDAQ:FSLR) is a manufacturer of photovoltaic solar modules with an advanced thin-film semiconductor technology, operating in two main business segments: Components and Systems. The Components segment designs and makes solar modules, which take the energy from the sun to turn into electricity. The Systems segment provides complete turnkey PV power systems or solar solutions to customers.
In the Systems business, the completed solar power plants are sold to investor-owned utilities, independent power developers, and other commercial companies. In 2012, the company derived most of its revenue, $2.7 billion, from North America, whereas revenue from Germany and France was $104.7 million and $70.2 million, respectively.
Strong cash flow position with the strongest balance sheet
The majority of its revenue, $2.18 billion, or 64.7% of total 2012 revenue, was generated from the Systems segment, while the Components segment produced around $1.19 billion in revenue in 2012. However, only the Systems segment was profitable, earning nearly $648 million for the company while the Components segment experienced a loss of as much as $688 million in 2012. However, its cash flow position seemed to be quite strong. Its operating cash flow and free cash flow were $762 million and $383 million, respectively.
What I like about First Solar, Inc. (NASDAQ:FSLR) is its strong balance sheet. As of December 2012, it had more than $3.6 billion in total stockholders’ equity, more than $1 billion in cash and short-term investments, and only $562 million in both long and short-term debt. The two other big liabilities were accrued expenses of $554.4 million and payments and billings for deferred project costs worth $636.5 million.
Indeed, First Solar, Inc. (NASDAQ:FSLR) has the strongest balance sheet in the solar industry, with a lower leverage than its peers, including SunPower Corporation (NASDAQ:SPWR) and Trina Solar Limited (ADR) (NYSE:TSL). While First Solar’s debt/equity ratio is only 0.1, the debt/equity ratio of both SunPower and Trina Solar are much higher, at 0.8 and 0.5, respectively.
A new and more efficient product
SunPower Corporation (NASDAQ:SPWR), incorporated in 1985, is now under the control of TOTAL S.A. (ADR) (NYSE:TOT), which has a 66% stake. It designs and makes high-performance solar systems worldwide for residential, commercial, and utility-scale power plant customers. The biggest customer of SunPower is NRG Solar, accounting for around 35% of its total revenue.
SunPower also generated a majority of its revenue, $1.7 billion, or 70.1% of total revenue, from the Americas. Recently, SunPower introduced its new product line for the residential market, the SunPower X-Series Solar Panels, which could offer up to 21.5% more efficiency. The product has been validated by the National Renewable Energy Laboratory.
The SunPower X-Series product is considered the most efficient in the solar industry now, whereas solar panels of First Solar, Inc. (NASDAQ:FSLR) are around 12.9% efficient. Trina Solar Limited (ADR) (NYSE:TSL) also has efficient panels, which are 14.7% – 16.4% efficient, with a lower sale price per watt of $0.64. The panels of First Solar cost a bit higher at $0.68 per watt.
Chinese solar player Trina Solar generated most of its revenue, $622.9 million, or 48% of its total revenue, from Europe, while the U.S. ranked second with $331 million in revenue, accounting for 25.5% of total revenue. Trina Solar seems to have a concentrated customer base, with its top five customers representing around 25.1% of its total revenue in 2012. Its largest customer contributed around 9.1% to its total sales.
Valuation
Among the three, First Solar seems to be the most attractive. At $37 per share, First Solar is worth around $3.3 billion. The market values First Solar at only 4 times EV/EBITDA and 0.96 times sales. SunPower is trading at $10 per share, with a total market cap of $1.2 billion.
As SunPower generated only $38 million in EBITDA over the past twelve months, its EV/EBITDA is as high as 45. Its price/sales stays at 0.55. Trina Solar is the smallest company among the three, with around $310 million in total market cap. At $4 per share, the market values Trina Solar at 0.26 times sales. Its EV/EBITDA is not valid as the company had negative EBITDA.
My Foolish take
First Solar is a good and safe solar stock due to its strong balance sheet and low valuation. SunPower is more of an opportunistic stock with its new 21.5% efficient SunPower X-Series panels. The highest energy efficiency of SunPower’s new products could differentiate it from the other two competitors. However, I would rather wait for further improvement to initiate a long position in SunPower.
The article Light Up Your Portfolio With These Solar Stocks originally appeared on Fool.com and is written by Anh HOANG.
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