Will Solar Power Remain Profitable in 2014?

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The staggering rise in the consumption of solar power in the U.S. has provided a tailwind for shares of solar panels manufacturers including First Solar (NASDAQ: FSLR  ) and SunPower  (NASDAQ: SPWR  ) . These companies are likely to face stronger competition, however, which could cut down their profitability and impede their progress. Let's further explore these issues.  

Outlook for 2014
According to the Energy Information Administration, the demand for solar power is expected to reach 0.425 quadrillion Btu -- this represents a 34% jump compared to 2013. Among all other renewable energy options, solar power will present the highest gain. Nonetheless, solar power will still represent less than 5% of total renewable energy consumed. Therefore, even though the solar sector is growing very fast, it will still account for a small portion of the U.S renewable energy market.

This expected rise in demand for solar power will translate to higher number of solar panels installed. Case in point, the EIA  estimates consumption of solar power grew by 36% during 2013. Further, the Solar Energy Industries Association estimates, 751 MW of new photovoltaic (PV) capacity was installed during 2013 -- this comes out to a 41% rise, year over year. This growth is also likely to benefit solar power companies.

According to First Solar's recent guidance for 2014, the company expects to increase its sales by over 16% year over year. SunPower projects its revenue will be roughly $2.55 billion -- less than a 2% gain over 2013. 

These developments are likely to increase the competition and bring the price of solar panels down. According to the Solar Energy Industries Association, the average price of a photovoltaic installed system dropped by 15% during 2013. This trend is likely to persist as competition intensifies. A decline in prices could also lead to lower profit margins. SunPower projects its 2014 gross margin will reach an average of 20% and could fall as low as 19%. Back in 2013, this margin was 20.4%. 

First Solar's gross margin is projected to drop from 26% in 2013 to around 17% in 2014. This could partly explain the company's lower than expected earnings per share guidance for 2014, which is between $2.2 and $2.6 per diluted share. In comparison, last year, First Solar's EPS was $3.7. 

Both companies expect to see a decline in their profit margins during 2014. Nonetheless, both companies still expect to increase their capital expenditure during 2014. First Solar's capital expenditure is expected to range between $300 million and $350 million; back in 2013 its capex was $282 million. The company also has a war chest of more than $1.3 billion in cash, so a liquidity problem isn't likely to be an issue anytime soon. Even if First Solar's operating cash flow contracts in 2014, this won't force the company to cut down on its capex.

SunPower also expects to increase its capex to $160 million. Last year it was only $34 million. 

Final note
Solar power consumption is likely to keep rising precipitately in the coming months. But the ongoing decline in prices and stronger competition could slash the profitability of solar panel manufacturers. Therefore, these developments could reduce the valuation of solar panels companies and their appeal as an investment.

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Read/Post Comments (4) | Recommend This Article (3)

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 30, 2014, at 1:57 PM, ronwiserinvestor wrote:

    "These companies are likely to face stronger competition, however, which could cut down their profitability and impede their progress." You've got that right!

    Here's the reality: SolarWorld's latest trade war complaint has already impacted pricing for the major name brand Chinese manufacturers which have now raised pricing for the larger solar lease and PPA players.

    Smaller dealers are still able to buy much lower priced (sub 55 cents per watt) non-name brand, but still high quality solar panels which were already in the country prior to the latest price increase.

    This will make the solar leases and PPA companies even less competitive as we move further into 2014's selling season.

    Couple the much lower cost for these smaller dealer's purchased system pricing with all of the new $0 down loan offerings with tax deductible interest, (remember leases and PPAs don't offer tax deductible interest) and you have the makings of a slow death spiral for the solar lease and PPA companies.

    Word is spreading fast. Consumers today want much lower (sub $2.90 per watt) system pricing, $0 down solar financing with tax deductible interest, they want to keep the 30% federal tax credit and any cash rebates and they want to own their systems instead of renting from a solar lease company.

    The low hanging fruit (non solar savvy) consumers have been picked. 2014 will spell the end of solar leases and PPA company's domination of the market. System sales (not leases) will "own" the market this year. No pun intended.

  • Report this Comment On March 30, 2014, at 8:43 PM, king4life wrote:

    The articles for the demise of solar are daily, monthly, yearly, for the last 3 years. That's good. Because we longs need short-squeezes to make this worth wild. According to my TDA account, SPWR has posted Positive Surprise's the last 10 Qtr's. Some analyst appearing on CNBC said FSLR was going to go bankrupt. SUNE is loaded up with whales called Cooperman, Soros,and Einhorn.

    Europe set an minimum price, that no other industry outside of the farm, that I know o,f has that.

    The Environment terrorist will prevent LNG from shipping any more than they are to Europe at the same time Russia is going to punish them on NG.

    That leaves Solar and Wind, but Wind makes too much noise and kills Eagles.

  • Report this Comment On March 31, 2014, at 5:21 PM, clanza875 wrote:

    This article is extremely unclear on whats driving cost reductions. Increased competition means prices must go lower? Or are you saying that China is still dumping product below cost? Certainly no company is improving their input costs for mono and multi crystalline technology. So its unclear how prices can keep going lower unless these companies are still dumping product just to stay solvent.

  • Report this Comment On March 31, 2014, at 9:06 PM, camarodan64 wrote:

    solar demand catching up with supply in 2014 is the key

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Lior Cohen

Lior has been a contributor for the Fool since 2012. His main interests are in commodities, and energy and materials companies.You can follow him on Twitter to stay up to date with his industry analysis. @tradingnrg

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