Earnings season is in full swing, and in the next two weeks U.S. solar giants First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) will report earnings. It's an important report, in part because their yieldco 8point3 Energy Partners (NASDAQ:CAFD) launched during the quarter.
It's also important to see how two of the longest-lasting and most profitable companies in the solar industry are holding up versus competition and how they view the future. Here are a few things to expect in the report.
8point3 Energy will have a big impact
Over the last couple of years, both SunPower and First Solar have been holding solar projects on their balance sheets in anticipation of launching a yieldco. Now that the yieldco is launched, they'll recognize some revenue and earnings from these projects, but that's where it gets complicated.
Since neither company owns over 50% of the yieldco, they're not consolidating its operations, or folding the yieldco's balance sheet and income statement into their own. SunPower will sell projects to 8point3 Energy Partners for cash and then recognize 59.3% of the sale's revenue and earnings immediately with 40.7% deferred until the project's contracted power purchase agreement is completed. These percentages coincide with SunPower's 40.7% ownership of 8point3 Energy Partners.
For the second quarter, the $359.9 million SunPower received for 170 MW of projects will result in $213.4 million in revenue with the rest spread over about 20 years. Earnings for the projects will be treated the same.
First Solar, on the other hand, will simply record all of the cash received from the sale as revenue and earnings as well. The transaction will be the same for both companies, but the accounting is a little different.
In the second quarter, these transactions will have a big impact on earnings, so watch for them to be a big topic of discussion, both on the release and the conference calls.
To grow or not to grow?
The big unknown for both First Solar and SunPower is how profitable they will be and how fast they'll grow.
SunPower provided its long-term manufacturing growth plan last fall (seen on the right) and we should start seeing some of that growth in coming quarters. A 350 MW capacity expansion will begin production later this year and I also expect another expansion announcement sometime this year. But SunPower needs to start getting more aggressive with its expansion to maintain market share globally.
First Solar said last quarter that technology improvements, a restart of previously shut-down manufacturing, and an expansion in Ohio would add about 1 GW of capacity over 2013's production.
Will First Solar continue its growth now that its technology has caught up with competitors'? It would be a bold move to announce a major capacity expansion, but that might be just what the company needs right now.
At the very least, investors should hope to see an increase in contracted backlog now that manufacturing is picking up. That would help improve profitability and provide more dropdowns to the yieldco, which adds value for years to come.
Do profits keep on coming?
The yieldco should add more value for First Solar and SunPower than selling projects previously did, and both companies could crank up the growth engine, but neither of those mean anything if they can't maintain profitable operations, now and in the future.
Building solar projects has become a razor-thin-margin business, but these two companies have remained profitable, not something most competitors can say. If that continues and margin expectations remain high, then both stocks have a lot of upsides. If they don't, they could both fall.
SunPower's earnings are due out after the market closes on Tuesday, July 28, and First Solar will report after the close on Tuesday, Aug. 4. They'll tell us a lot about what's winning and what's not in solar so these are important dates for investors.
Travis Hoium owns shares of 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.