Solar stocks have been crushed over the past year as an oversupplied industry has put downward pressure on solar prices and investors demanding higher returns have brought the value of solar assets down.
What shouldn't be overlooked, however, is that solar energy still has enormous potential for investors. It's disrupting a $2 trillion electricity industry, and with costs coming down all the time the market continues to expand around the world. First Solar, Inc. (FSLR +2.51%), SunPower Corporation (SPWR +0.00%), and 8point3 Energy Partners LP (CAFD +0.00%) are three companies that will benefit when the market turns around.
Image source: SunPower.
Built for long-term survival
In an industry where financials can fluctuate, balance sheets matter a lot. And no solar company has a better balance sheet than First Solar, Inc. The company has long maintained a high level of cash and very little debt, allowing flexibility when the market goes through turmoil.
FSLR Total Long Term Debt (Quarterly) data by YCharts
First Solar's big improvement over the past three years has been a jump in its solar panel efficiency. The company has long been a low cost manufacturer, but it was behind even commodity solar panels in efficiency. That's no longer the case, with average conversion efficiency at 16.2%.
The utility scale solar business that First Solar serves will see weak results over the next 18 months because of a drop in demand in the U.S. and China, driven by short-term subsidy changes. But the company's balance sheet will be able to live through the turmoil and come out on the other side as a profitable company with a differentiated product.
The high efficiency solar play
Solar manufacturer SunPower is in a slightly different market. It produces a high efficiency panel that puts it in a position to do well in the residential and commercial markets. These markets are constrained by space and put more value on efficiency. About half of the company's panels are currently going into residential and commercial sales, which are gaining momentum. The Equinox residential solar system has sold better than anticipated, and Equinox sales for commercial building have begun to ramp up as well. And management is upgrading a 150 MW facility from lower efficiency E-Series panels to X-Series, which are the highest efficiency on the market today.
In the utility scale business, SunPower has introduced its third generation Oasis platform, which uses drones to design sites, is more flexible on land usage, and even allows for farming or grazing on a site. Like First Solar, the power plant business will likely be slow in 2017 because of those same subsidy changes facing First Solar, but SunPower is already signing power purchase agreements for projects that will begin production in 2018.
SunPower has earned $1.34 per share in the last year, and while the next year may be rough, I think the stock is a good value looking 3-5 years down the road.
A steady performer in solar energy
For a more stable company, investors should look at 8point3 Energy Partners, a yieldco created by First Solar and SunPower to own and operate solar power plants. The yieldco pays cash upfront for solar projects, then collects cash from utilities and other customers over the duration of a contract, which is usually more than 20 years. This creates consistent cash flows that are paid to investors in the form of a dividend.
What's attractive right now is the 6.4% dividend yield, which has been growing at an annualized rate of 15%, something that should continue for the next couple of years. And we know that power plants already on the balance sheet will be producing cash to pay that dividend for decades to come.
8point3 Energy Partners doesn't have the upside potential of First Solar or SunPower, but it's a great dividend stock for investors looking to jump into solar energy. And it doesn't come with the same risk level as solar manufacturers either.
