Another Way to Invest In Solar Than the Solar Panel Manufacturers

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First Solar (NASDAQ: FSLR  ) , the second largest company in the solar panel industry, reported after the bell Tuesday and left Wall Street disappointed. Earnings per share of $0.89 were $0.10 below analysts' consensus. and revenue of $768 million fell short by a massive $208.25 million. Adding insult to injury, First Solar's $3.3 billion in sales for the year missed not just Wall Street's expectation but even its own goal of $3.4 billion to $3.6 billion. And it doesn't get any better: Expected revenue of between $800 million and $900 million for the current quarter falls short of the Street's $905.58 million target.

The problem? The price of solar cells is falling. First Solar's margins have been taking a hit as sales figures have dropped, even while unit sales remain the same or even increase.

Manufacturing processes and efficiencies have improved in recent years, especially as Chinese solar-cell makers have moved into the market. That means lower costs, which are great for consumers -- and, in the long run, for the viability of solar as an alternative power source --  but getting to the point where First Solar can be profitable and grow its business while offering a reasonable price to consumers could take some time. Shareholders could be in for a rough ride until then.

If shareholders want to consider an alternative in the meantime, there's Solar City (NASDAQ: SCTY  ) . Since it doesn't manufacture its own solar panels, Solar City doesn't have to deal with First Solar's pricing and margin issues. It designs, installs, and sells or leases residential and commercial panel systems. The bulk of its business comes from the leasing side, in which Solar City will generally sets up the system for free in exchange for a 20-year contract. The system can be removed or a new lease signed at the end of the term.

Solar City is unprofitable right now, and its business model is cash-heavy on the front end. But the revenue stream from a typical lease agreement will provide capital and profits for the business starting a few years after an installation is done, and as the business grows, it could become wildly profitable and sport healthy margins. It's true that the stock has risen 351% over the past 52 weeks, but I don't think that should scare anyone away, considering the company is still valued at just $6.75 billion and the solar industry has seen installations grow 670% from 2010 to 2012. That figure which will probably only continue to rise as the price of panels continues to drop.

In short, this is not a business for someone with a short-term investing horizon, but the rewards could be generous for those who stick around.

Foolish thoughts
There are no guarantees in investing. In the case of First Solar, the price of solar cells could stabilize tomorrow and the business could begin growing sales and profits shortly afterward, making an investment in the company today the smart move. But if panel prices keep falling, moving into a company like Solar City and limiting the potential downside risk looks to be the best option.

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  • Report this Comment On February 26, 2014, at 1:57 AM, wiserinvestor wrote:

    On the surface, getting a solar system on your roof from a solar leasing company for no money out of pocket might seem like a great deal, but here are the facts behind this type of rental financing. When you sign that solar lease contract you'll be forfeiting the 30% federal tax credit which can typically be worth about $3,500 to $10,000. You'll also be forfeiting any applicable cash rebate or other financial incentives. After collecting both the 30% federal tax credit and any cash rebate, the leasing company will also apply accelerated depreciation. Despite applying all of the financial incentives, on a $0 down 20 year solar lease, the leasing company will then charge you 20 years worth of leasing payments that many times will include up to a 2.9% annual payment escalator that will raise your monthly payment, every year for twenty years.

    The leasing companies will try to convince you that a solar system requires a lot of maintenance and expensive insurance and costly monitoring when nothing could be further from the truth. Modern grid tie solar system require little to no maintenance and the bulk of any repairs are covered by the manufacturer's and installer's warranties. Solar panels and many inverters come standard with a 25 year warranty. Insurance can be added through your homeowner's insurance policy with little to no increase in your premium and many solar systems come standard with built in, web based monitoring.

    The bottom line with insurance, repairs and monitoring is that a leased solar system will typically cost you up to three times more than a purchased solar system, so it is actually you who will be paying for these services, not the leasing company. The leasing companies will try to convince you that these services are free but with a system cost that's triple that of a purchase, these services are absolutely not free.

    The leasing companies will try to convince you that a purchased system requires a lot of upfront costs and that their rental financing is the only $0 down option in town, which again is not true. There are plenty of $0 down loans available that even offer tax deductible interest and require no upfront costs. Solar leases and PPAs do not offer tax deductible interest.

    What's worse is that after paying 20 years worth of leasing payments that amount to triple the amount that you could have paid if you purchased your system instead, you won't even own the solar system. It will still be the leasing company's property. If you want to own it after paying your lease off, you will still need to buy it from the leasing company at fair market value. All this for only a 10 to 15% reduction in your electric bill. This is just the tip of the solar lease and PPA iceberg. For more information simply search the term solar lease disadvantages in any major search engine. There's a lot you should consider before signing that airtight 20 year lease contract.

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Matt Thalman

Matt primarily covers the Dow Components, the Major Indexes daily moves, Consumer Goods stocks, and General Investing Topics.

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Related Tickers

8/31/2015 11:18 AM
FSLR $47.94 Up +0.14 +0.29%
First Solar CAPS Rating: ***
SCTY $48.23 Up +0.23 +0.48%
SolarCity CAPS Rating: ****