Last week, I covered two concepts that are extremely important for solar investors to understand -- cost per watt versus cost per kW-hr and cell efficiency versus module efficiency. Today I'm taking the solar discussion to the company level and looking at two factors that will separate companies that will survive the solar shakeout from those who won't.
The balance sheet matters now more than ever
Equity investors can often overlook how important the balance sheet is for a company. Today in solar there may not be anything more important than the balance sheet. If a company can manage its debt and maintain enough cash it may be able to survive the solar shakeout. If it can't customers will lose confidence and before long bankruptcy will be on the table.
The balance sheet also is becoming increasingly important to installers. Most panels come with a warranty and sometimes a service contract is added, which is only worth a hill of beans if the company can remain solvent. First Solar (FSLR 1.24%) and SunPower (SPWR +0.00%) have pointed out in recent conference calls that their strong balance sheets have become a point of strength when negotiating with customers. For companies looking to be long-term players the balance sheet is becoming a differentiator for manufacturers.
So where do solar companies stand? Below is a table that includes last quarter's sales, cash, debt, and a ratio of net debt to sales, which should approximate a company's long-term ability to pay off debt.
|
Q2 2012 Sales |
Cash |
Total Debt |
Net Debt |
Net Debt/Sales | |
|---|---|---|---|---|---|
|
First Solar |
$957.3 million |
$743.7 million |
$518.9 million |
($224.8) million |
(0.23) |
|
SunPower |
$595.9 million |
$394.2 million |
$835.0 million |
$440.8 million |
0.74 |
|
Trina Solar |
$346.1 million |
$841.0 million |
$1.30 billion |
$461.8 million |
1.33 |
|
Yingli |
$488.5 million |
$882.5 million |
$2.70 billion |
$1.81 billion |
3.70 |
|
Canadian Solar |
$348.2 million |
$692.1 million |
$1.50 billion |
$809.6 million |
2.32 |
|
LDK Solar |
$235.4 million |
$296.2 million |
$3.57 billion |
$3.27 billion |
13.90 |
|
JA Solar |
$284.4 million |
$622.6 million |
$809.2 million |
$186.6 million |
0.66 |
Source: Company filings.
As you can see, very few of these are viable long-term companies with their current capital structures. Yingli Green Energy (NYSE: YGE) and LDK Solar (NYSE: LDK) have net debt/sales ratios so high that it's a wonder they're still in business today.
On the other hand, three companies stand out as the strongest from a balance sheet perspective. First Solar, SunPower, and JA Solar (NASDAQ: JASO) all have net debt/sales ratios under one, which can be used as a weapon against weaker companies when making sales. Trina Solar (NYSE: TSL) isn't far behind the curve either.
The balance sheet is an important consideration in solar, but so is the amount of money each company makes on each module it sells. That's why gross margin is the second factor investors needed to consider.
Profit matters
Outside of First Solar, there isn't a solar manufacturer making a consistent profit on each module it sells. But we can get an idea who is heading toward profitability by looking at gross margins in recent quarters. A higher margin means a company's cost structure is low or its competitive advantage is strong enough to demand a premium. A low (or negative) margin means there could be serious trouble ahead.
|
Q1 2012 Gross Margin |
Q2 2012 Gross Margin | |
|
First Solar |
15.4% |
25.5% |
|
SunPower |
9.2% |
12.3% |
|
Trina Solar |
5.8% |
8.4% |
|
Yingli |
7.8% |
4.6% |
|
Canadian Solar |
7.7% |
12.4% |
|
LDK Solar |
(65.5%) |
(39.1%) |
|
JA Solar |
2.1% |
4.8% |
Source: Company filings.
The table above clearly confirms that LDK Solar is one of the worst companies in all of energy because both the balance sheet and the income statement are terrible. JA Solar and Yingli Green Energy aren't quite in negative territory, but low single digits aren't pointing to profitability any time soon.
We are finding a theme though. First Solar and SunPower are among the best, joined this time by Canadian Solar (CSIQ 3.75%).
The power of numbers
It isn't difficult to see the companies who are separating themselves and who are falling behind. Based on the numbers above it would be crazy to own LDK Solar and Yingli Green Energy in their current state. Another solar stock that I didn't cover, Suntech Power, falls into the same boat and hasn't even reported second-quarter numbers because of accounting issues.
We can see First Solar and SunPower separating themselves as well. These American companies may be fending off competition from China but they're still in the best position to win in the long term.
Trina Solar, Canadian Solar, and even JA Solar have a chance to join the top echelon if they can maintain reasonable balance sheets and continue margin improvements. But weak margins and weak balance sheets will keep me from buying any Chinese solar manufacturer for now.
By understanding a company's balance sheet and margins solar investors can make educated decisions about which companies will survive long-term.
