by Lawrence Meyers | January 4, 2013 9:35 am
Before you go bonkers over solar stocks, there are some important concepts to understand regarding the purchase of two SunPower (NASDAQ:SPWR) solar photovoltaic power plant projects by MidAmerican Energy, a subsidiary of Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, BRK.B).
The first concept has to do with physics and the overall foolishness of buying solar power for your home or business. I sat down with a materials and electrical engineer a few weeks ago, and he explained that only the tiniest-spectrum frequencies of sunlight are actually convertible to energy by a solar cell. As I’ve written before, there’s a reason it’s called a semiconductor and not just a conductor.
That’s why, even if you have photovoltaic cells sitting in direct sunlight for decades, they might not end up generating enough energy to have recouped your cost. The cells also degrade under UV rays, which are always being received by the cells (courtesy of the sun). So the cells degrade from the first second they are hit by the sun and decline in efficiency until they die.
Solar simply does not pay for itself, except possibly over 20 or 30 years. So if you want to feel good about saving the environment, ignore the enormous energy used to mine for silicon (and then melt it!), and pretend you are doing good. Otherwise, you are a sucker because solar is not — nor will it ever be — as efficient as fossil fuels.
That, however, does not mean Buffett is a sucker.
Let’s look at SunPower more closely. It’s possible that because of the company’s position in California — where the government spends money on all kinds of lunatic ideas, such as a bullet train nobody will use — combined with government incentives, Buffett might actually make money on this specific deal, regardless of the physics. In fact, I’m willing to bet that the dirty little secret of this deal involves politics, crony capitalism, and insiders getting rich at shareholder and taxpayer expense. Warren Buffett is an adviser to Obama. There’s too much going on in the background to make me comfortable that this deal is solely because SunPower was involved in a great business.
SunPower was not a great business. It lost more than $600 million in 2011, and it has lost money every quarter this year … though it squeezed out a $22 million operational profit after adding back in $70 million in non-recurring charges, bringing the total of non-recurring charges over the past two years to half a billion dollars. Free cash flow has been negative $200 million in the trailing 12 months, and SPWR sits on half a billion dollars in debt.
Tell me, how exactly is this a robust business of the type Buffett usually deals with?
It doesn’t look like it to me. If anything, it gives even more credence to my thesis that this deal was done for reasons other than it being a cash cow. One wonders if the $1.2 billion loan guarantee comes attached to the deal.
The question is: Does it matter?
The Barnum Effect says that as long as people believe what they want to believe, there will always be suckers. I think you’re a sucker to get involved in solar in any way. But as we’ve seen with other Buffett deals, when he buys an asset, similar assets with equity in the public markets soar. In Thursday’s case, we saw other solar companies like LDK Solar (NYSE:LDK) and Yingli Green (NYSE:YGE) propelled by double digits.
That doesn’t mean they are great companies, although it might.
That doesn’t mean the government won’t keep throwing money at solar (and it probably will), which helps blunt potential risk.
That doesn’t mean enough suckers won’t buy solar panels for their home or business.
That doesn’t even mean the sector Buffett buys into is actually a good sector to be in. (I think he was dumb to buy newspapers.)
Which is why the physics might say to short SunPower and every other solar stock … but the irrationality of people that make up the stock market might actually say to buy.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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