Just when it looked like solar ETFs were fading after a fantastic run in 2013, a merger between two solar panel companies has reinvigorated those stocks and the ETFs that hold them. This week, solar panel installer SolarCity announced that it is acquiring Silevo, a solar panel manufacturer, for an undisclosed amount.
SolarCity shares jumped 17.6 percent, or $9.65, to $64.53 on Tuesday, breathing new life into the Guggenheim Solar ETF (TAN | C-39) and the Market Vectors Solar Energy ETF (KWT). The both jumped more than 3 percent on Tuesday, and are up 25.1 percent and 21 percent, respectively, year-to-date.
Chart courtesy of StockCharts.com
Last year, TAN and KWT were up 128 percent and 105 percent, respectively. However, both ETFs tumbled from their respective highs in March as investors fled momentum-related ETFs on concerns about the slow growth of both the U.S. and Chinese economies.
TAN’s continued dominance over its competitor KWT can be explained in part by the fact that it allocates more of its portfolio to SolarCity—6.2 percent versus 4.3 percent for KWT, and, importantly, that it engages in an aggressive securities-lending program, as ETF.com’s Director of Research Dave Nadig wrote in a blog last spring.
Elon Musk, chairman of SolarCity and chief executive officer of Tesla Motors, wrote in a blog that the deal will help the company dramatically grow its operations. SolarCity is now in talks with the state of New York to build a manufacturing plant “that will be one of the single largest solar panel production plants in the world,” Musk wrote. In other words, Silevo would build any panels related to the New York deal.
“Although no other acquisitions are currently being contemplated, SolarCity may acquire additional photovoltaics companies as needed to ensure clear technology leadership and we plan to grow internal engineering significantly,” Musk wrote in the blog.
The deal was also driven in part by the Commerce Department’s recent decision to impose steep tariffs ranging from 18.6 percent to 35.2 percent on Chinese solar panels alleging that the manufacturers had benefited from unfair subsidies from local governments.
In addition to SolarCity, investors should note that both TAN and KWT also have a sizable exposure to Chinese solar companies, and returns for these ETFs may not be quite as good going forward because of the implications of the new tariffs.
Tariffs aside, SolarCity’s motivation for buying its own panel maker instead of relying on Chinese suppliers also stems from the fact that the company is looking to get ahead of the Obama-administration-backed solar investment tax credit, which will drop for industry participants to 10 percent in 2017 from 30 percent currently.
The solar investment tax credit reduces the tax liability for individuals or businesses that buy qualifying solar energy technologies. It is designed to encourage private sector investment in solar manufacturing and solar project construction.
“They want to get [the NY manufacturing plant] up and running by then, and reduce their costs to the point where it’s going to offset the decline in incentives they’ve been receiving,” said Angelo Zino, an S'P IQ Equity analyst.
Oddly, Zino added that S'P is bullish on most of the solar stocks that it covers, with the exception of SolarCity because “it is hard to justify the multiples that the company is getting right now relative to the rest of the industry.”
SolarCity currently has an earnings per share of -0.47, its profit margin is -19.7 percent and its operating margin is -95.0 percent. Yet it’s trading at $66.00.
TAN is slightly more expensive than KWT, with an annual expense ratio of 70 basis points, or $70 for each $10,000 invested, compared to 66 basis points.