All solar panels aren't created equally. But while leading technology can be a competitive advantage, the strength of a company's balance sheet and management's skill handling expenses and allocating capital are far more important. That's why one expert says investors should think about solar-panel makers more like steel companies than technology companies.
A full transcript follows the video.
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This video was recorded on Dec. 20, 2018.
Nick Sciple: Can you talk a little bit about the dynamic between the tech-focused cutting-edge panel manufacturers vs. what you're seeing from some of the more commodity-focused manufacturers like Junko Solar? What should investors think about when deciding where they should allocate their cash between those two broad categories of panel makers?
Jason Hall: There's three legs to this stool. You have the companies that are focusing more on the commodity. They're really focusing on driving down the cost per watt as much as they can. You have two panels, they're the same size physically, their power production qualities can be very, very different. For example, let's say you have a SunPower (SPWR -0.28%) panel. SunPower makes some of the most efficient panels that, per square inch of space, they generate the most electricity, in terms of output on the backside. Then, you take a Canadian Solar panel or a Jinko solar panel, they may only be operating at 16% or 17% efficiency. So, you think about the difference between 16% efficiency and 21%, that 21% panel actually generates about 20% to 24% more electricity. So, for the same size, you're getting a quarter more power. So, when you're actually pricing them out, you look at the cost per watt, which normalizes based on actually how much power you're getting from it.
Companies like First Solar (FSLR -0.96%), which makes the thin film panels, which work really well in temperature variations like high heat or colder area. They tend to produce a more consistent amount of power. Then, SunPower, which is super high efficiency.
Then, on the other hand, you have the commodity panel manufacturers. What you have to look at with these companies is, look at their cost per watt. How much does it cost them to manufacture a panel on a per wattage basis? When you're looking at them as an investor, that's something you really want to understand about their business.
The next part of it is, you want to think about balance sheet management. This is an excellent year, but demand can shift substantially from one year to the next. You have to look at how financially well-built the company is in terms of being able to ride that out. On the best-case scenario is definitely First Solar. This a company that has a little over $2 billion in cash on its balance sheet right now. We're heading into 2019, which is not expected to be a particularly good year for the solar industry. It's going to be a little more stable than 2018, but it's not going to be a particularly booming year. First Solar is going to invest somewhere between $650 million and $750 million in adding to its manufacturing capacity, to its Series 6 panels, which are its newest, most efficient panels. It's still going to generate roughly $300 million in positive cash flows over what's going to be a bad year, and it's going to be making substantial investments.
Most of its competitors are going to spend 2019 just trying to make it through. You're not going to see them being able to make these big investments because most of these companies don't carry anything like the amounts of cash that First Solar has. Also, they tend to carry substantially more debt as a portion of their total net value.
That's the reason for me. When it comes to investing in a panel maker, SunPower is one that's always at the top of my list. If you look at how much it stock price has fallen this year, now's a great time to be looking closely at SunPower.
Sciple: SunPower, not First Solar?
Hall: Oh, sorry! I was looking at SunPower on my screen. [laughs] First Solar. Thank you for catching that! Yeah, First Solar is absolutely at the top of my list and generally always stays there, especially the price it's at right now. I think it represents a pretty good value.
Sciple: It sounds like it's very similar to what we talk to our listeners about with oil and natural gas businesses. You really need to have a strong balance sheet to be able to ride what goes on in the cycle and be able to make investments not whenever it works for you, but whenever the market justifies it.
Hall: Probably the best industry to compare it to, in terms of the cyclicality, is the steel industry. Think about steelmakers. It's an industry where the shifts in demand can be very sudden and very large. But these are very capital-intensive businesses with high fixed costs. You can quickly swing from losses to profits in a very short period of time. A company we've talked about before, First Solar is kind of like a Nucor of the solar industry. It doesn't pay a dividend, it's a newer company, but in terms of that balance sheet, management that does a really good job of allocating capital, that's a good comparison for me.