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Actionable news in SCTY: SolarCity Corporation,

Forget About SolarCity And SunEdison: Embrace First Solar And Sunworks

Summary

I examined the solar industry for the best companies.

I found that SunPower and SolarCity should be avoided.

Based on my research, First Solar and Sunworks are the best companies in the solar industry.

With the recent collapse of SunEdison (OTCPK:SUNEQ) and the hammer dropping today on SolarCity (NASDAQ:SCTY), I thought it would be a good time to search for the best solar companies. SunEdison succumbed because of a crushing amount of debt, and SolarCity fell over 20% today because it issued poor guidance. As I will detail below, investors could, and should, have seen these two massive declines coming from a mile away, and it will become clear which solar companies are worth considering going forward.

Search Process

Criterion #1: Profitable

Looking at whether a company is profitable or not is one of the simplest criteria to use, and surprisingly, it is very difficult to find a profitable solar company. For my search, I looked for U.S.-based solar companies that were profitable and are traded on a major exchange. I only found three companies that met these criteria, and those were First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWR) and Sunworks (NASDAQ:SUNW).

Criterion #2: Long-term debt

When long-term debt exceeds revenues, it is a clear sign of having too much leverage. As the following table shows, SolarCity and SunEdison have significantly more debt than revenues than they have posted over the last year. SunPower has the same amount of long-term debt as it does revenues, and First Solar and Sunworks have almost no debt, which shows the strength of their respective business models.

Revenue

LT Debt

LT Debt as % of Revs.

Solar City

SCTY

399.6

2441

610.86%

SunEdison

SUNEQ

2497

9767

391.15%

SunPower Corp.-A

SPWR

1520

1765

116.12%

First Solar Inc.

FSLR

3958

205

5.18%

Sunworks Inc.

SUNW

53.71

0.23

0.43%

(Table data from GuruFocus, data in millions)

Criterion #3: Current Ratio

When looking at SunEdison, I noticed that the current ratio was only slightly above 1, which shows that the company barely has enough assets to cover its short-term liabilities. As you can see in the following table, SolarCity is actually worse off in terms of short-term liquidity. First Solar, SunPower and Sunworks all have a current ratio of over 2, which shows that they have plenty of short-term liquidity.

(Table data from GuruFocus)

Criterion #4: Gross Profits vs. SG&A

Many companies will spend large sums of money to generate large amounts of revenue and thus gross profit. However, when expenses [SG&A] are growing faster than gross profits or SG&A is higher than gross profit, that is where there can be problems. As you can see in the table below, SunEdison and SolarCity have SG&A that has been above gross profit for each of the last four quarters. In addition, the growth rate of SG&A for both has exceeded the growth rate for gross profits, which shows that spending is outpacing profits. SunPower has had three of the last four quarters where SG&A exceeded gross profits, and the company has grown SG&A faster than gross profits. On the other hand, First Solar and Sunworks have each had gross profits that have grown faster that expenses, and combined, only have one quarter where SG&A was above gross...


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