The future for Solar investors: Think Cash Flow

Investing in Solar and other alternative energies has been a hazardous experience for investors for several reasons:

  • Too much competition which results in price cutting and profit margin pressure which results in volatile earnings and significant stock volatility.
  • Reliance on government subsidies in an era of budget restraints.

But these issues are the primary problems associated with investing in solar cell manufacturers.

What about investing in Solar Farms that have their infrastructure in place and long term selling agreements with credible utilities?  This is an entirely different enterprise than just selling solar panels since this is really an issue of cash flow.

Warren Buffett’s MidAmerican Energy Holdings Co. agreed to buy the Topaz Solar Farm in California from First Solar Inc. on Dec. 7. The project’s development budget is estimated at $2.4 billion and it may generate a 16.3 percent return on investment by selling power to PG&E Corp. at about $150 a megawatt-hour, through a 25-year contract, according to New Energy Finance calculations.

“After tax, you’re looking at returns in the 10 percent to 15 percent range” for solar projects, said Dan Reicher, executive director of Stanford University’s center for energy policy and finance in California. “The beauty of solar is once you make the capital investment, you’ve got free fuel and very low operating costs.”

With Treasury yields in the 2% to 3% range solar farms offer a viable alternative to bonds.  In my opinion its only a matter of time before solar farms are offered in either a REIT or MLP structure to the public, where the cash flow generated is passed on to shareholders with special tax considerations.  Best of all, the cash flow comes without the risks and headaches of solar panel manufacturing and sales.

Now we’re finally getting somewhere.


No positions

What I know and what I wish I knew

A short while back I decided to return to writing on the blog as a way to encapsulate my thoughts and review tactics and strategies.   With the noise that exists within our culture and data driven industry we can lose ourselves to the impulses caused by the most recent data points.

The talking heads on TV uniformly speak with such clarity and conviction but are never held accountable to the results of their recommendations.  Do they eat their own cooking the way I do?  I doubt it very much.   So while you the reader may consider that this blog is for your benefit please consider its also for my benefit at well.

What do we know:

The political leadership existent within the US and Globally lacks the political will and savvy to solve the debt and currency crisis.   There is a continual sense that their intentions are to “kick the can down the road” for future leaders and tax payers.  The lack of cross the aisle cooperation between parties is pathetic.  The Republican’s lack of cooperation, even at the cost of benefit to the country in order to gain the White House appears to be the game plan.  Speaker Boehner is even disagreeing with the proposed short term tax credits proposed in the jobs bill.

If you’re a country that cannot print money then you are crashing.  Why this is lost upon the tea party, I have no idea.

There is a global race to devalue currencies.  PIMCO predicts the Euro will fall to 1.20 USD within three to six months.   When Janene and I were in Paris this May the Euro was 1.45 USD.

2012 estimated earnings for the SP 500 are coming down in deliberate fashion.   In August the estimate for 2012 was $112, now they are at $110 and falling.

Most European stock markets are down 15%-20% while the US is down 2% for the year.    Macroeconomic data continues to deteriorate.   Last night Goldman Sachs lowered their end of the year target for the SP500 to 1250 down from 1400.

Investors are extremely bearish.  AAII figures show 40% bears against 30% bulls.  This is an uncomfortable status in light of my hedged positions.   The issues of Greece, the Euro, our budget impasse, US debt, falling currencies and high odds of recession appear to be largely baked in the cake of many share prices.

Shares of dividend paying stocks look very attractive relative to bonds.

Contrary to Bernanke’s talk:  US money supply is rising.  Rising money supply frequently has a steroid effect in the short term for stock prices to move higher.

With Peyton Manning on the sidelines is there is no doubt that Tom Brady is simply the best at his position.

What I don’t know:

How low will SP 500 earnings estimates fall before they bottom?   The average recession cuts earnings by 25% from the previous peak or in our case $75 a share.

While a Greek default is inevitable, can Europe handle a Greek default in an orderly fashion, and then an Italy default, followed by a Portugal default……..rinse and repeat.

Will the Chinese support the Euro to allow multiple currency options for its growth.

Can the European banks reduce their systemic risks and raise gigantic amounts of capital they require?

One potential cure-all would be for the Chinese to let the Yuan trade freely on its own merits?  Is this just pie in the sky hopin and wishin?

Will investors finally purge Treasuries en masse and allow yields to rise?

Is our unemployment issue systemic (see Doug Kass) or cyclical (Paul Krugman)?

Can the opinions expressed by Tim Geithner in stating there will be no Euro Lehman’s be trusted?

How can Duane Allman and BB King be ranked higher than Eric Clapton in the Rolling Stone Top 100 guitarists of all time.  I’ve adored Live at the Fillmore East since I was a kid and Riding with the King is superb but shouldn’t the breadth of work by Clapton be considered?


Long Clapton


Iberdrola SA (IBDRY) The Worlds Largest Clean Energy Utility

Catching my eye today is Spain’s Iberdrola SA which is the worlds largest clean energy utility symbol IBDRY and the second largest utility in Spain.    It is also the worlds largest provider of Wind Power.   Iberdrola stated in 1998 they intended to invest over $8 billion dollars in clean energy, primarily wind power in the United States, regardless of what Congress may or may not do with tax incentives.

IBDRY plans on building a 30 megawatt wind farm on US forest service land in Vermont and will be called Deerfield Wind Power.   Vermont Public Service plans to buy 20 megawatts of power from Deerfield at an undisclosed price with a contract for nine years.   Iberdrola will have the option to sell the remaining 10 megawatts at market prices.   The project will have 15 wind turbines.

Iberdrola SA is an interesting company in which we have no position in but will commence doing our homework on.   In 2008 the company was the potential target of a takeover attempt by France’s state owned Électricité de France and Germany’s E.ON.

Shares of IBDRY are trading at just under $30 a share with an estimated Book Value of $29.73 with a dividend of just over 5.8%.  Cash on hand is $6 a share which subtracting from the Book Value and using last years $2.68 in earnings creates an Earnings Yield of 13%, pretty good.

Based upon valuation relative to growth I believe IBDRY deserves further attention.   IBDRY meets our standards for Green Investing in that IBDRY is not a speculative company dependent upon a make or break product.   IBDRY could make sense for most investors who seek a long term investment in Alternative Energy.

No Position