I’ve said it before, and I’ll say it again — solar stocks are a sucker’s bet.
If you cannot create a product that can stand on its own without government subsidy, then your business is unsustainable. The reason solar is not a good business is because it takes years — measured in decades — to recoup the expense on large projects. It’s such a bad deal that even the great company Siemens (NYSE:SI) is shutting down its solar business and taking enormous writedowns.
Even out here in Los Angeles, the fiscal geniuses in the Los Angeles Unified School District shelled out millions to construct solar panel carports in school parking lots. We need that money now for education, but they spent it to allegedly save more over the next 20 years.
Add to this that there are multiple solar companies competing for the space where solar might actually make a real difference — the Middle East — and you have a commoditized product that will make even less money for the builders. There’s falling demand for solar, as China has oversupplied the market with panels. As long as China continues to produce more product at lower prices, nobody else will be able to compete.
While American outfit First Solar (NASDAQ:FSLR) did beat estimates by 22% in its recent earnings report, it was on a 17% decrease in revenue, to $839 million from $1 billion. The problem: Cost of sales only declined 4%, from $626 million to $600 million. Thus, First Solar is basically paying as much for fewer sales than it did last year.
Operating income was sliced almost in half. Consequently, gross margins fells from 37.7% to 28.4%. (Ouch.) The company also expects operating cash flow in the $650 million to $850 million range, down from $850 million to $950 million, but again, that doesn’t even tell the whole story. Free cash flow is negative $40 million. And that’s only because capex this quarter was $57 million, when it’s usually two to four times that much.
First Solar isn’t in imminent danger of bankruptcy given its $717 million of cash, and low-cost debt of $468 million. But it needs to stop burning cash.
The same lipstick-on-a-pig report came from Germany’s SunPower Corporation (NASDAQ:SPWR), by “only” reporting a 5-cent-per-share loss vs. expectations of a 22-cent loss. However, GAAP results showed a 41-cent loss, much of it due to a “share lending arrangement,” which sounds a little odd to this reporter. Regardless, revenue was down 8% year-over-year.
SunPower sits on $377 million in cash against $434 million in convertible debt. It is $212 million in the red on operating cash flow so far this year, and $289 million on free cash flow.
Zacks sums up exactly why SunPower — and solar in general — remains a huge mistake for investors:
“The company is witnessing cascading Average Selling Prices (“ASP”) and margins in its residential and small commercial markets segment. We expect this trend to continue in the near future with valuation further restrained by the higher cost structure of the company compared to its peers, the glut of solar panels in the market, lower ASPs and foreign exchange risk.”
Do you want to be invested in an industry with “cascading average selling prices” of your product?
I don’t.
Get out or short both — along with the rest of the solar stock universe.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. But he does have crappy old solar panels on the roof of his abode. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
