The solar industry has finally reached the point where some clear leaders are emerging and developing technology and scale advantages that will be hard to disrupt. Leaders haven't yet begun to display the profitability they might someday, but it looks like the days of bleeding red ink may soon be over.
Not all parts of the solar industry are worth investing in, but I think SunPower (NASDAQ: SPWR), First Solar (NASDAQ: FSLR), and TerraForm Power (NASDAQ: TERP) stand above the rest.
Image source: First Solar.
There aren't many companies that have had a more volatile last few years than SunPower. The company's high-efficiency solar panels have come under pressure as Asian commodity solar panels cut costs and often were sold at a loss. The company had to shut down some production late last year, and it's taken time for upgrades to high-efficiency (X-Series) and commodity cell-based (P-Series) production to ramp up.
2018 should be a year when SunPower starts to put some of its legacy challenges behind it and shows a steadier state of operations for investors. Residential and commercial solar sales have already stabilized and are beginning to show gross margins approaching 20% combined. Utility sales will take longer to recover, but P-Series production is already at 400 MW in Mexico and 1.2 GW is ramping in China, most of which will be sold along with trackers and other components in Oasis system sales.
SunPower is also putting most of its large-scale project development business in its past. 8point3 Energy Partners (NASDAQ: CAFD) is up for sale and the company should sell most of the legacy projects on its balance sheet by early 2018. After that, it will focus on component sales to utilities and system and component sales to residential and commercial markets. That's where SunPower can leverage its superior technology, and as it does, I think the stock's current run higher will continue.
If SunPower is the volatile solar manufacturer, First Solar is the stable one. The company has long had a better balance sheet and higher profitability than competitors and 2017 was no different. Production, sales, and earnings all beat expectations and First Solar had so much demand that it delayed upgrading some of its Series 4 production to Series 6, a product that will be launched in 2018.
What's a little odd about 2018 is that it'll be a down year as production upgrades take place. Even after the year and spending more than $1 billion on production upgrades, management says it will end 2018 with $1.6 billion to $1.8 billion in net cash. That's a balance sheet no other solar company can match, making this one of the safest solar stocks on the market.
It's been two years since TerraForm Power went through its own upheaval, nearly going bankrupt along with SunEdison. But now the yieldco is controlled by Brookfield Asset Management and has a bright future ahead.
TerraForm Power has assets that will generate about $95 million to $115 million in cash available for distribution (CAFD) in 2017, but Brookfield is providing $500 million in financing and 3,500 MW of projects for the yieldco to acquire new growth projects. That should keep the company growing and churning out an ever-higher dividend.
That dividend currently yields 6% at the projected payout of $0.75 for 2018. With the strong yield, stable assets, and a sponsor with a history of value creation in renewable energy, this is a great solar stock for investors who don't want to take the risk of owning a solar manufacturer.
2018 should be better for solar stocks
Solar stocks have been in an odd position for years, battling falling panel prices from Chinese panels and changing policies in the U.S. that have affected their business. But 2018 should bring a level of stability as international markets have become more predictable and manufacturers like First Solar and SunPower are booking sales years into the future.
Investors are pricing in high tariffs from the Trump administration, but if proposed tariffs in the U.S. come back lower than expected, we could see solar stocks pop in 2018. That could be the macro driver for the industry, but no matter what happens, I think SunPower, First Solar, and TerraForm Power are positioned to be leading solar stocks.
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