Is SunPower Really Worth 2.5 Times First Solar?

SunPower (NASDAQ: SPWR  ) is trading at a trailing P/E ratio around 50 while its competitor First Solar (NASDAQ: FSLR  ) trades at a trailing P/E ratio around 20. Such a big difference in valuation could signal that SunPower is heavily overvalued or that it is a far superior company. The situation is complex, but taking into account changing margins and fundamental product differences SunPower really is the superior growth stock for long-term investors.

Margins
SPWR Gross Profit Margin (TTM) Chart

SPWR Gross Profit Margin (TTM) data by YCharts

First Solar has traditionally had superior margins to SunPower and low-cost manufacturers like Yingli Green Energy (NYSE: YGE  ) , but things are moving in a new direction. SunPower's high efficiency panels are in such high demand that in 2013 it produced 1,134 MW, utilizing 94.5% of its annual capacity. First Solar's panels are not as attractive and its 2013 capacity utilization was just 77%.

Yingli's rising margins are a dangerous sign for First Solar. Yingli's growth allows it to pump more money into its R&D operations and better serve cost-sensitive solar purchasers. Yingli did post an operating loss of $185 million in 2013, but from Q1 2013 to Q4 2013 its gross margin improved from 4.1% to 12.2%.

First Solar's thin film panels were designed to win the cost wars by offering a low price and low efficiency, but the return of Chinese manufacturers and the rising importance of efficiency has forced First Solar to go in a new direction. Its new TetraSun modules offer significantly higher efficiencies and are expected to ramp up production in Q3 and Q4 of 2014. First Solar's TetraSun panels will be a big help with their high efficiencies over 21%, but SunPower already offers panels that are up to 24% efficient.

The rooftop difference
Not only is SunPower producing great panels, it is a big distributed generation player. In Q4 2013 it shipped 48 MW of residential and light commercial systems in North America. This is significant as the dedicated solar installer SolarCity (NASDAQ: SCTY  ) installed 103 MW, just slightly more than double what SunPower installed.

Both SunPower and SolarCity are growing by leaps and bounds, but SunPower's integrated approach has big advantages. SunPower can easily work in the distributed generation markets or the utility markets, offering panels and complete systems. By working with the entire solar market it is better able to deal with instabilities in government policies. The U.S. residential market is heavily exposed to the solar tax credits that are set to expire in 2016, and this could put a big dent on SolarCity's growth. 

SolarCity is still a major growth stock. Its revenue grew from $30 million in Q1 2013 to $47 million Q4 2013, but SunPower's diversification helps it to have a more consistent growth profile.

First Solar has traditionally focused on the utility market instead of the distributed generation market. This was its only choice given thin film's low efficiency. Now that First Solar is bringing its TetraSun panels to market SolarCity and SunPower will have another competitor. Still, SolarCity's and SunPower's head start should give them an advantage.

What's a Fool to do?
Year over year First Solar's 2013 revenue fell by $60 million while SunPower's revenue grew $90 million in the same time frame. SunPower's margins are improving and it is running at capacity while First Solar is far below capacity. First Solar is in a better position than others like Yingli, but at the end of the day SunPower has the superior growth trajectory.

The downside is that SunPower is trading with a valuation around 50 times earnings. To justify an investing at this valuation you need to be willing to invest for the long term and be ready for the market's swinging sentiments.

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 24, 2014, at 1:45 PM, clanza875 wrote:

    SPWR will be lucky to avoid bankruptcy. Their technology is too expensive. Their margins will eventually turn negative as CdTe catches up on efficiency for a fraction of the cost to manufacture.

  • Report this Comment On March 24, 2014, at 7:32 PM, DMC wrote:

    Seems to me SPWR's P/E (=32/1.68) is about 19 x 2013 earnings and FSLR's P/E (=74/4.35) is about 17x 2013 earnings. I presume we don't disagree on present price. So what trailing earnings numbers are you using?

  • Report this Comment On March 25, 2014, at 4:45 PM, UKGary wrote:

    Sun Power and First Solar are producing panels for very different markets.

    Sun Power's panels are ideal for solar arrays on a size constrained roof top as yield per area is very high. This is particularly advantageous in high priced markets like the USA and Japan where balance of system is a major cost component.

    Sun Power may be approaching the efficiency limits of their technology so limited upside there, but still reducing production costs at a very competitive rate. Learning curve may eventually bring production costs per watt in line with other silicon PV producers whilst retaining the yield per area and balance of system (BOS) advantages that make Sun Power so popular - after all, Sun Power panels need less frame, glass, cable, support rail, junction box and labour per watt than other panels.

    First Solar panels are ideal for large ground mount solar farms, particularly in high temperature regions with low installed cost. First Solar's Cadmium Telluride technology is less affected by heat achieving significantly more kWh annually per nominal kW than silicon panels in such conditions - look for First Solar to do well in India, North Africa, Australia and the Middle East.

    First Solar manufacturing cost per watt are already low, with further cost gains likely to be achieved by higher panel efficiency. First Solar is making rapid progress on efficiency with their top lines delivering panels with similar yield per area per year to standard Silicon panels. (Nominal efficiency is lower but more kWh per nominal kW delivered) Further progress on efficiency will drop BOS costs rapidly making First Solar projects competitive with fossil fuel generation in many sun belt nations, and potentially starting to earn a place in the rooftop markets.

  • Report this Comment On March 25, 2014, at 5:19 PM, arkhon wrote:

    DMC, not sure where you get your numbers. For 2013 Sunpower had $0.79 and $0.70 EPS basic and diluted respectively (taken from their own 10-K).

    That would give: 22/0.7 = P/E ~31

    More importantly though, 2014 EPS projected around $1.25, so:

    22/1.25 = F P/E ~17.6

    not too bad :)

    long SPWR

  • Report this Comment On March 27, 2014, at 1:33 AM, ronwiserinvestor wrote:

    Here's high efficiency solar technology that's worth taking a look at. Hyper X solar offers a better PTC to STC ratio "Real World" performance according to the California Energy Commission's performance rating listings than over 100 of SunPower's solar panel models. Hyper X solar also offers an incredible -0.27%/degree C temperature coefficient rating for awesome performance in hot/warm climates and best of all Hyper X solar systems are priced thousands less and even tens of thousands less on larger systems than a SunPower solar system.

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