SunPower Corporation (SPWR), First Solar, Inc. (FSLR): Is Solar Power Still a Viable Investment?

SunPower Corporation (NASDAQ:SPWR) and SunEdison continue to present operating losses; First Solar, Inc. (NASDAQ:FSLR), however, turned a profit in the first quarter of 2013. But the company’s current operating profit margin is only 7.8%.

Nonetheless, don’t be confused by First Solar’s low P/E, which currently stands at 9.5. You should consider a different calculation using First Solar’s enterprise value to determine its attractiveness as an investment.

The table below shows the valuation of First Solar, Inc. (NASDAQ:FSLR), its EV to EBIT ratio, and the ratio of Environmental and Electrical Equipment markets – two markets that First Solar is related to. Even though First Solar’s P/E is low compared to the Environmental and Electrical Equipment markets averages, the company’s EV to EBIT ratio is 9.36, which is higher than these markets averages. This means the company’s current stock is more expensive than the market averages.

Funding growth

The biggest problem with high investment costs and little to no profits is finding ways to maintain this growth with funding. For now, it seems that investors and bankers still believe in the solar industry. This could explain how SunEdison has recently received $100 million in loan from Wells Fargo to finance a 2.7 gigawatt project the company is developing. Nonetheless, the company’s very high debt-to-equity ratio of 5.31 could hold back SunEdison; the company might eventually have to raise equity in order to keep banks funding its projects. The situation for SunPower Corporation (NASDAQ:SPWR) and First Solar, Inc. (NASDAQ:FSLR) is much better as their current debt-to-equity ratios are much lower at 0.8 and 0.15, respectively.

The bottom line

Even though the consumption of solar energy is likely to further rise in the coming months, this industry is still very competitive, which means margins are likely to remain very low. Therefore, I suspect companies such as SunPower Corporation (NASDAQ:SPWR) and First Solar, Inc. (NASDAQ:FSLR) won’t be able to turn revenues into higher profits that will benefit investors over time.

Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Is Solar Power Still a Viable Investment? originally appeared on Fool.com.

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