attea2d

First Solar Inc. (FSLR) this week posted revenue far below Wall Street’s view as weak demand and heavy competition weighed on prices. First Solar (FSLR) said it had third quarter revenue of $153 million, up $99 million, or $1.20 a share from a year ago. That beat analysts’ average view of $1.74 per share. But the company generated revenue of $481 million in the quarter, sharply below the $529 million expected by analysts.

One of the biggest hurdles any new investor in solar stocks faces is getting up to speed on the technology. As with all technologies, the rapid pace of progress can leave investors uncertain as to where to place their bets. How can you tell which companies are the most promising? There are four important criteria to keep in mind when evaluating solar companies.

CUSTOMER CONCENTRATION

A company heavily dependent on a few major customers is more exposed to the risk of losing one or more of its top customers and would also have less bargaining power with its customers. For example, BP Plc’s (BP) BP Solar accounts for about 30 percent of JA Solar’s (JASO) sales, and the investor  would like to see a more diverse mix of customers.  Similarly, First Solar (FSLR) derives a significant percentage of its revenues from a small core group of customers primarily within Europe and specifically Germany- the world’s biggest solar market.  For Energy Conversion Devices (ENR), 40 percent of revenues come from its top five customers. An investor would ideally want to invest in a solar company with a broad, diversified customer base.

TRACK RECORD IN ACHIEVING SCALE

It is important for a solar company to be able to move technology from the laboratory to the factory as soon as possible. As Yingli Green (YGE) notes in an SEC filing, “Deviations in the manufacturing process can cause a substantial decrease in output and, in some cases, disrupt production significantly or result in no output.” If a company has a reliable approach to replicate its production lines in order to ramp up, it would be able to achieve scale with more ease and reliability.

Energy Conversion Devices(ENR) presents an interesting case where ramp times have decreased dramatically over the last few quarters. As execution risk may have several or many underlying causes, a company’s ability to scale commercially is a significant risk and must not be underestimated. Thin film technologies have a scalability advantage in the sense that the deposition techniques they employ can be more easily moved from the laboratory to the factory.

Suntech Power (STP) plans to manufacture higher efficiency solar cells using Pluto technology and has in place a pilot line to achieve conversion efficiencies of 18 to 19 percent. Given its relatively limited operating history investors would want to know how feasible it is for the company to achieve the required scale. Despite the newness of many solar companies, the investor must judge execution risk by allowing for increases in his discount rate for either or both new companies and new technologies.

MANAGEMENT QUALITY AND CORPORATE GOVERNANCE

Management quality is a parameter which is a crucial element of an investor’s decision parameters. Corporate governance is another area where investors seek reassurance. He or she would want to know if there are any potential pitfalls related to conflicts of interest.

Management’s experience in the Company and Industry is a simple yet reliable indicator of a company’s ability to deliver on its plans.

Top management at JA Solar (JASO) includes several officers who are very new to the company.

Management at SunPower (SPWR) has been stable over the last five years. Key management personnel come with strong experience and credentials in the solar industry.

Evergreen Solar (ESLR) also has an experienced management team.

Energy Conversion Devices (ENR) has leading photovoltaic experts such as Dr. Subhendu Guha and Michael  Fetcenko in its management ranks. On the other hand, several of the other management personnel – including the President and CEO – are relative newcomers to the company and industry.

The management team members at First Solar(FSLR) are generally composed of personnel experienced in high technology industries.

Such an analysis of the company’s management credentials and track record would lend strong support to an investor’s decision on whether to invest in the company.

POTENTIAL CONFLICTS OF INTEREST AND OTHER COPORATE GOVERNANCE ISSUES

An investor would want to know up front about any conflicts of interest that senior management members might have. For example, JA Solar’s  (JASO) chairman is also the chairman of one of its major suppliers. Further, some companies have antitakeover measures incorporated in their charter. An investor in a solar company would want to look at these provisions and study their potential impact in the future. In the case of First Solar (FSLR), a significant percentage of shares (>45 percent) is held by a single shareholder and affiliates.

My personal picks are:  Sunpower (SPWR) and Evergreen (ESLR). They still have significant upside left, as well as a stable and experienced management team.