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Is Warren Buffett Betting Big on Solar?

By Travis Hoium – Apr 9, 2013 at 3:00PM

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Rumors are swirling about Warren Buffett buying Suntech Power, but does that make any sense?

Is Warren Buffett really interested in buying into the ultra-competitive Chinese solar industry? Bloomberg is reporting that Buffett has been sniffing around the remains of Suntech Power (NYSE: STP), formerly the largest solar manufacturer in the world. The company defaulted on U.S. loans last month and a unit in China entered insolvency, the equivalent of bankruptcy in the U.S.  

Why solar and why now?
This wouldn't be Buffett's first move into solar. He has spent billions buying projects from First Solar (FSLR -1.26%) and SunPower (SPWR -2.39%) in the southwestern U.S. But these projects aren't manufacturing facilities like Suntech; they're power plants that come with predictable costs and predictable cash flows, much more up Buffett's alley.

The Bloomberg report suggests that Buffett is eying the future profitability of solar in the second half of this year. The profitability thesis is consistent with comments from SunPower and some Chinese manufacturers, but Suntech hasn't even reported financial statements since the middle of last year. Even then, it was losing millions of dollars. Why would Buffett buy Suntech's parent company if its largest subsidiary is bankrupt and the continuing operations are losing money?

Maybe he has his eye on the bankrupt portion of Suntech?

Buying on the cheap
What Buffett could conceivably be doing is looking at buying assets out of bankruptcy. Reports are that the banks Suntech owes want to liquidate the assets instead of restructuring debt and continuing operations. If Buffett made an offer for the assets that would exceed liquidation costs it could be a good deal for debtors.

This doesn't seem like Buffett, though. Buying high-risk assets in a high-risk industry goes against everything he's done for decades.

Not Buffett's style
I would be shocked to see Warren Buffett acquire any part of Suntech because it simply doesn't have the qualities he looks for in a company. It's not profitable, doesn't have a differentiated product, doesn't have a competitive moat, and is on the cutting edge of a new industry. These are all qualities Buffett has stayed far away from in his career.

A more likely possibility would be a position in a U.S. manufacturer like SunPower or First Solar, but even that seems like a stretch. Buffett likes predictable cash flows and big competitive moats, something no one in solar can offer today.

Fool contributor Travis Hoium manages an account that owns shares of SunPower. Travis Hoium personally owns shares of SunPower and has the following options: Long Jan 2015 $7 Calls on SunPower, Long Jan 2015 $5 Calls on SunPower, and Long Jan 2015 $15 Calls on SunPower. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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