The future of humanity really depends on finding new ways to extract energy from sources that do not harm our environment and are more abundant. This is why I really love the potential in the solar industry.
Through solar, consumers can secure predictable electricity costs, usually with a one-time investment, and help the environment, as solar creates 91% less carbon dioxide pollution than natural gas and 96% less carbon dioxide than coal.
Two solar companies in particular stand out: Canadian Solar (CSIQ, Financial) and SolarCity (SCTY, Financial). I want to present facts and figures only.
SolarCity
SolarCity is by far the most popular solar company in the market thanks to its chairman Elon Musk, who has a 22% stake. SolarCity offers solar power, energy efficiency and electric vehicle services across 14 states and has 2,510 employees.
Elon Musk’s first cousin, Lyndon Rive, is co-founder and CEO of SolarCity. Chief Technology Officer Peter Rive is Lyndon Rive’s brother and another of Musk’s first cousins. Both have sizable positions in SolarCity, which is important considering the company is the subject of a takeover by Musk’s Telsa Motors (TSLA, Financial).
SolarCity shareholders will receive 0.11 shares of Telsa, which equates to about $22 a share. With the stock trading at $19.96 currently, the arbitrage yield is fairly attractive at 10%, 46% annualized. SolarCity is building a giant solar field on 50 acres of land in Hawaii and has been buying the batteries for that project directly from Tesla.
Musk seems 100% committed to a combined, vertically integrated organization and hopefully regulators are too. In April, SpaceX (another Elon Musk company) purchased $90 million in solar-backed bonds from SolarCity on the back of $165 million on SolarCity bonds it bought last year. Musk took out $475 million in personal credit lines to pump money into SolarCity and Tesla through share purchases. He secured the credit with over $2 billion in stock holdings from SolarCity and Tesla.
SolarCity financial highlights
- $1.95 billion market cap
- $400 million in sales
- $58 million loss
If if wasn’t for the fact that SolarCity and Tesla are merging, I wouldn’t even think twice about the stock. Zero earnings and somewhat incestual behavior make the case for longevity and durability a long shot for me. The good news is that Tesla has continued to show its strength in the market. It’s probably a great time to buy SolarCity. Even if the deal falls through, long-term prospects will be insulated because of the massive overlap (both personally and professionally) that the company has with Musk’s other companies.
Canadian Solar
The company is engaged in the design, development and manufacture of solar products, including a range of solar modules built to general specifications for use in a range of residential, commercial and industrial solar power generation systems. Canadian Solar has 8,969 employees and successfully delivered over 15 gigawatts of premium quality modules to over 90 countries around the world since 2002.
Today, the company announced the sale of its stake in the Pirapora I solar power project in Brazil to an EDF Energies Nouvelles affiliate, EDF EN do Brasil. Despite the liquidation of the 80% stake, the company forecasts solar energy to grow from approximately 0.5% of the total global electricity generation to over 10% by 2030. I believe this to be a conservative estimate and that we’re likely to a far higher number by then.
Canadian Solar financial highlights
- $822 million market value
- $3.47 billion in sales
- $171 million net profit
- Sales rise of 5,000% since 2006
- Book Value growth of 1,500%
From a purely financial perspective, Canadian Solar is a much better buy than Solar City. The company earns a tidy profit and is priced at just 11x times forward earnings estimates. Canadian Solar has $2.5 billion in debt, a little more than $500 million in cash and a strong revenue stream that has risen from $68 million to $3.5 billion in the last decade alone.
Risk reward
With SolarCity trading shares for shares with Tesla, the 10% is merely a small discount to ownership in Tesla. Yet, since puts are not yielding the same amount, it may be worth buying into SolarCity and taking the discount. Especially if you believe Tesla is worth what analysts do - a lot more than $200 per share.
With Canadian Solar, the future hinges on whether or not emerging markets buy into its offerings. India, China and many countries across Africa could help Canadian Solar continue its accelerated revenue growth. With the current profit margins, that could put the stock back up to 2015 levels when it was in the mid-30s.
Disclosure: I do not own stock in, nor am I short, any of the companies mentioned in this article.
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