The solar industry has been crushed the last twelve months, but in many ways it's in a better position than ever. The cost to build solar plants is falling and is now competitive with fossil fuels, countries from the UAE to Argentina are building plans to expand in solar, and industry consolidation has left fewer major competitors.
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Despite the potential, there's still a lot of risk ahead. 8point3 Energy Partners LP (NASDAQ: CAFD), First Solar, Inc. (NASDAQ: FSLR), and SunPower Corporation (NASDAQ: SPWR) are three solar stocks with a lot of potential for investors, but some protection from risk as well.
Image source: SunPower.
The yieldco to play solar growth
One way to play the solar industry with very low risk is buying yieldcos. These are companies who own renewable energy projects with long-term contracts to sell energy to utilities and dividends that should grow over time.
8point3 Energy Partners is a yieldco created by SunPower and First Solar and it's one of the few that only owns solar projects. This creates a stable revenue stream because solar energy is highly predictable, unlike wind which can vary dramatically year to year. The company also has a very conservative balance sheet with only corporate debt, no project debt that can make yieldcos highly leveraged.
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The dual sponsor structure also gives investors assurance the yieldco won't overpay for projects, something that's been an issue with yieldcos controlled entirely by one sponsor. The 7% dividend yield is another plus, making this a great solar stock and dividend stock for your portfolio.
Thin film solar's lone survivor
First Solar has long been a leader in the solar industry with low cost thin-film panels and a large project development business. But the company ran into challenges over the past two years because of the rapidly falling cost of commodity solar panels and the falling competitiveness of its own product. To adjust, management is investing about $1 billion to upgrade all of its manufacturing capacity to a product it calls Series 6. The result will be a decrease in production in the next two years with a goal of being more competitive when updates are complete.
We don't know how First Solar's financial performance will look when upgrades are complete, but the company has a long history of profitability in solar, which most companies can't say. We also know how strong the company's balance sheet is. You can see below that First Solar is sitting on over $600 million in net cash and that's even before it sells projects currently on the balance sheet.
Despite the upgrades, First Solar plans to be at breakeven to a profit of $0.50 per share next year and end the year with a net cash balance of between $1.4 billion and $1.6 billion. That's a strong position to fall back on even if the solar industry remains as competitive as it is today. First Solar is worth betting on for the balance sheet alone and if Series 6 brings higher margins and bigger profits as expected that would be icing on the cake.
Image source: SunPower.
The solar efficiency leader
One of the hardest hit solar companies of the past year has been SunPower. The company's high efficiency panels were hurt by falling panel costs and management didn't execute on project signings and sales as expected, something competitors dealt with as well. But SunPower continues to have the highest efficiency panels on the market and it's taking lumps in 2017 in an effort to be more competitive in following years.
High efficiency should lead to strong results for SunPower's residential and commercial businesses, regardless of what utility demand looks like. But the company's transition to a new solar panel called P-Series in utility solar could bring both more flexibility and larger profits for the company long-term. Capital cost to build out P-Series capacity is just $0.05 per watt and the company's Oasis power plant design has never been more efficient to design and install. The company is already adding projects for 2018 and in upcoming months I would expect further project winds around the world.
What makes SunPower lower risk than it may appear on the surface is the fact that it's 2/3 owned by French oil giant Total (NYSE: TOT). This is Total's biggest bet on the booming solar industry and the company has given hundreds of millions of dollars in assistance to SunPower in the past and is buying projects from the company as well. Total has every incentive to see SunPower succeed and it'll help build a bridge to a brighter future for this solar company.
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