Tuesday, April 24, 2012
Next Move After Solar Sell-off
After a string of high profile bankruptcies, solar cell producers have taken some material hits in recent months. Out of a group of three dozen public solar cell and module producers listed and trading in the U.S. only three reported profits. The group is trading on average at 29% of 52-week highs. This looks like a corrected sector to me! What is the next move?
Crystal Equity Research has a buy recommendation on GT Advanced Technologies, Inc. (GTAT: Nasdaq) - one of the three in the group to consistently report profits. GTAT shares are trading at 5.8 times trailing earnings, while the average of the three profitable solar producers is 7.8 times earnings. GTAT is also trading off its own average price-earnings multiple of 8.8 times established over the four years since the company achieved profitability.
Maybe you are one of those “glass half empty” investors who believe even a strong company like GT Advanced Technology is not impervious to the stresses of falling prices, oversupply and competitive pressures that hang over the solar cell industry. I thought it might be interesting to consider the other side of solar energy - solar concentrating energy - to see if its unique economics has sheltered the group from the sell off that has plagued photovoltaic producers.
Concentrated solar applications avoid the high costs of photovoltaic cells. In the least, use of concentrated sunlight reduces the cost of solar power by requiring fewer photovoltaic cells to generate a given amount of electricity. A concentrator makes use of relatively inexpensive materials, such as plastic lenses and metal housings, to capture the solar energy shining on a fairly large area and focus that energy onto a smaller area, where the solar cell is. Solar concentrators can also be used for thermal solar applications for ambient air or water heating.
The solar concentrating group is not large and it is not certain that the group has been spared the solar sell-off. One in the group, Opel Technologies, Inc. (OPL: TSX) is headquartered in Ontario, Canada where solar technologies still benefit from considerable government support and consumer interest. The Canada Solar Industry Association (CanSIA) has forecast double digit growth in solar thermal units. By 2020, when solar thermal has become mainstream, the group has forecast 500,000 square meters will be added per year. This compares to about 120 square meters per year in the four years ending 2011. CanSIA has also forecast that the Canadian solar photovoltaic market will grow steadily increasing from less than 500 MW per year between 2011 and 2015 to up to 1,000 MW per year 2016 to 2020.
Opel can participate in both markets. The company produces equipment to track the sun’s movement and solar concentrating photovoltaic modules. The company has three dozen patents related to tracking and concentrating solar light.
Opel has a customer following, but has yet to report a profit. Management recently secured a $5.0 million revolving line of credit to help support operations as sales ramp. Working capital had been an issue in recent quarters as Opel struggled to ship its historic largest order of 4.6 MW of its TF-850 solar trackers to Global Energy Service USA. That order was completed in the March 2012 quarter.
As the solar industry struggles to reduce costs, it stands to reason that the more successful in the group will turn to lower-cost solar concentrating technologies - even as simple as such technology might seem in comparison to solar cells. It makes sense to include solar concentration properties like patent-rich Opel Technologies in a solar portfolio.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. OPL is included in the Solar Concentrating Group in Crystal Equity Research’s Beach Boys Index.