Big changes are pushing solar into the mainstream. Elon Musk’s SolarCity (NASDAQ: SCTY ) gave the industry a huge boost when it issued $54 million in bonds backed by income from installed distributed solar systems. This financing deal is critical because it means that the industry will have access to the $1.2 trillion U.S. asset backed bond market. With the potential amount of U.S. commercial and residential solar at real grid parity expected to grow by 22.6 gigawatts (GW) in 2014, solar is in for another big growth year.
Growth, growth and more growth
SolarCity installs solar panels on the roofs of commercial and residential customers. In states like California where electricity is expensive and there is lots of sunshine it has not been hard to find new customers. The company expects to install 278 megawatts (MW) in 2013, 121 MW more than it installed in 2012. This growth directory is expected to continue on through 2014.
Elon’s baby is also getting into the energy storage business. To decrease demand charges consumers can purchase the new SolarCity DemandLogic system. The device stores energy and releases it during times of peak demand, allowing a business to save money and put less stress on the grid.
Don’t expect SolarCity to make money anytime soon, but it is on a strong growth path. As traditional electricity prices continue to rise solar energy becomes more attractive. With better access to the capital markets SolarCity will be able to supercharge its growth before U.S. federal tax credits fall in 2016. On a price to sales basis the company is expensive with a ratio around 32, but it is still a small growth company.
SunPower (NASDAQ: SPWR ) is a big manufacturer, and it will be a major beneficiary of securitized bonds for distributed solar generation. It manufacturers high efficiency panels for space-constrained distributed systems, and these new finance techniques will provide a big boost. It already has experience with bond-backed solar developments, but traditionally these have only worked for utility plants like the €195 million it issued for an Italian solar farm.
Even though its revenue is not skyrocketing, SunPower is ready to grow with the distributed generation market. The company already has a big share of the U.S. distributed market with an estimated 22% of the residential market and 11% of the commercial market in Q1 2013. For value investors SunPower is a good stock to follow. Thanks to strong product offerings it is expected to post earnings per share (EPS) of $1.18 in 2014, and it trades at a more reasonable price to earnings ratio around 1.5.
Be careful of investing in everything
Utility projects have been First Solar’s (NASDAQ: FSLR ) specialty, and it has already seen bonds issued for its solar farms without government guarantees. Solar farms can be financed through the utilities with strong power purchase agreements, making their bonds more trustworthy in the eyes of investors. Back in 2012 MidAmerica successfully issued $850 million in bonds for First Solar’s Topaz Solar Farm.
First Solar’s presence in the distributed generation market will be boosted once its panels are more efficient, but it will probably be late 2015 before its panels reach 16% efficiency. First Solar boasts a healthy profit margin of 12.2%, but technological limitations hurt its ability to take advantage of new financing techniques in the non-utility market.
Simply buying a broad-based solar fund is dangerous. To benefit from new asset-backed bonds a company’s sales should be growing, not shrinking. The Chinese manufacturer LDK Solar (NYSE: LDK ) has seen its revenue fall from $2.509 billion in 2010 to $0.863 billion in 2012. It is just steps away from bankruptcy with equity of $-0.896 billion in the most recent quarter.
Bonds backed by payments from rooftop solar systems will be a huge boom for SunPower and SolarCity, allowing them to access a whole new market of investors. SolarCity is still a very speculative company with no profits in the immediate future, making SunPower a better option for risk-averse investors. First Solar is profitable, but it will be a while before it can boost its panel efficiencies enough to really take advantage of the distributed generation market. LDK Solar is so close to bankruptcy that it is best to ignore it.
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