Solar energy has been a very difficult place for investors as companies gain and lose their competitive advantage quickly and the market changes rapidly under their feet. At what appears to be a low point for the industry, investors may way to take a second look at First Solar, Inc. (FSLR 0.40%), NextEra Energy Partners LP (NEP 0.14%), and Vivint Solar Inc. (VSLR).
The market hasn't been happy with First Solar's business of late, primarily because the company is shutting down some manufacturing capacity over the next two years to upgrade from its current Series 4 module to Series 6. The upgrade will cost around $1 billion and lead to improvements in efficiency and balance of systems costs in solar installations, making First Solar more competitive as the product comes on line in 2018.
While the upgrades are going to cause a disruption, they also highlight just how profitable First Solar is in solar. Next year, management expects earnings per share to be between ($0.10) and $0.45, meaning the company can break even as it upgrades equipment. And at the end of the year, the net cash balance is expected to be $1.4 billion to $1.6 billion.
First Solar's market cap is currently $3.1 billion, meaning about half of its value is in cash on the balance sheet. Once Series 6 is up and running with around 3.0 GW of capacity, I think the company will return to strong earnings, making the stock a great value for investors willing to buy and hold long term.
NextEra Energy Partners
One company that buys solar and other renewable energy projects that generate consistent long-term cash flows is NextEra Energy Partners (NEP 0.14%), the subsidiary of utility giant NextEra Energy. The projects sell energy to other utilities on 20 year contracts, sometimes longer, creating a very stable business, unlike solar manufacturing.
What NextEra Energy Partners then does with that cash is pay a dividend to investors. Right now, the dividend yield is 5.5% and management aims to increase the payout as much as 15% annually, provided it can buy projects accretively.
But there's a hidden benefit from this payout as well. The early dividends are a return of capital from buying projects in the first place, so they're not taxable. That makes the effective dividend even higher and given the stability of the payout, this makes NextEra Energy Partners a great pick in today's market.
One company that's gone through a crisis in 2016 and is now primed for a comeback is Vivint Solar. I don't think most national installers are in a good strategic position today, but I do believe Vivint Solar has the underlying value, cost structure, and incentive to make transformational changes that could make it a good long-term investment.
On the value front, management estimates it has $369 million in net retained value, after accounting for net debt, on the balance sheet, which is more than the company's $297 million market cap. Future operations are just upside for investors.
On the cost front, cost per watt of $2.85 is among the lowest of national solar installers. The low cost structure will allow Vivint Solar to maintain competitive as the market evolves.
Perhaps most importantly, Vivint Solar's rocky year has led to a management shakeup that could drive necessary changes. The company has added loans to the mix and energy storage will likely be a solution they add in time. Moving to more loans would help both the bottom line and the balance sheet, and with a competitive cost structure, the company may make more money than competitors. Vivint Solar is a company to watch in residential solar.