As the world has become more interested in global warming and alternative energy, solar power has been one of the stars. While solar energy offers many promises, it has been generally inefficient and costly to use, and storing solar energy has also been a big obstacle. The stimulus bill President Obama signed on Tuesday includes more than $42 billion in energy-related investments. One of the most exciting renewable energies that will be pursued more in depth with the funding is solar energy. In October, Popular Mechanics published an article titled “Inside Solar Power’s Top 5 Next Game-Changing Technologies” by Alex Hutchinson, which outlined some innovative products in the solar industry and listed some true players in the market that we believe investors interested in alternative energy will find very inspiring.
The article notes that SunPower Corporation (SPRWA) was chosen by the Department of Energy (DOE) to put a 205-kilowatt solar installation on the roof of its headquarters in D.C. SunPower has developed back-contact, silicon photovoltaic (PV) cells with an efficiency of 23.4 %, a record for large-scale, mass-produced cells. What makes these PV cells so special is their design: the electrical contacts are on the back of the cell, allowing the front more exposure to the sun. On the momentum of that big project, SunPower recently agreed to build a 250-megawatt solar ranch in California, which is expected to begin delivering power in 2010. A project of this size is not necessary for an individual consumer, whereas a few PV panels on the rooftop of his/her home would do the trick. However, a problem arises here in that these panels produce DC (direct current) power, when the average household appliance requires AC (alternating current) power. Most DC to AC converters lose power in the process and are too costly, except for the newest device called the microinverter, which allows these panels to directly output AC power, and each panel’s performance can be wirelessly monitored. This has prompted the DOE and venture capitalists to pump several million dollars into companies like SmartSpark Energy and Enphase Energy, which are pursuing this latest technology.
Concentrating PV panels, which use lenses and mirrors to help concentrate the sun’s light, have also become a popular development, as they increase efficiency and lower costs. Emcore (EMKR), a company who has surpassed past efficiency records, says it has developed cells with up to 45% efficiency utilizing the company’s own concentrating PV ideas.
The cost of silicon has been a significant roadblock for solar power development as its price has increased by 10 times its previous levels. Alternatives to silicon-based solar cells are available but they are less efficient. First Solar (FSLR) makes its PV cells from thin films of cadmium telluride, but their efficiency is only about 10% and cadmium is considered hazardous. To improve efficiency, the National Renewable Energy Laboratory built a thin film panel made of cadmium indium gallium selenide (CIGS) which boasts 19.9% efficiency, comparable to the efficiency of silicon panels.
While all these advances in efficiency and costs savings works great when the sun is up, what do we do when the sun goes down? That problem is being addressed by German company Solar Millenium AG, who built a solar power plant in Spain using concentrating solar thermal technology to allow it to run approximately 7.5 hours when the sun is down or behind a cloud. This technology is different from PV panels in that it uses a “vast arrays of curved mirrors…to focus sunlight on a liquid, heating it to over 750 F and boiling water to power a steam turbine. Storing power simply requires the equivalent of a giant thermos to store the heated liquid until steam is desired.” The U.S. is expected to get a storage-enabled 280-megawatt plant in 2011.
All of these ideas seem to offer a few key takeaways: 1) Solar power is making many advances, becoming more efficient and less costly, and should soon become competitive to other forms of energy in terms of value while reducing the side-effects of fossil fuels such as pollution; 2) Solar power is already being delivered in several forms today, and many more vast projects are in store for the coming years; 3) Storage technology is being developed to help overcome solar power’s biggest obstacle: the absence of sunlight. These trends, coupled with the spending on renewable energy in the stimulus bill, are reason for interest in the solar industry. Furthermore, according to the International Energy Outlook 2008 released in June of last year by the Energy Information Administration (EIA), “electricity is expected to remain the fastest-growing form of end-use energy worldwide through 2030, as it has been over the past several decades.”
Listed below are some companies mentioned in the article, as well as other players in solar power today. Accompanying each stock, are its respective market cap, P/B, forward P/E, P/4Q rolling sales, annualized sales growth since inception, and sales growth expectations priced into the stock utilizing AFG’s Value Expectation application (assuming 2008 EBITDA margins and asset turnover levels remain constant in the next 4 years). The big risk with companies based on new technology is whether the company will survive the current credit crunch in order to see their technology come to fruition profitably.

*Data is as of 02/17/2009






Recently The Applied Finance Group, LTD provided rankings for CEO Magazine to identify the greatest wealth creating and wealth destroying CEOs in the S&P 500. In the spirit of the upcoming Super Bowl between the Arizona Cardinals and Pittsburgh Steelers, we would like to compare companies in the two respective states to see which state’s CEO is the best wealth creator.
AFG’s scoring methodology is based on its proprietary Economic Margin Framework that sets out to correct accounting distortions and properly understand the market expectations priced into a stock. Most investors understand the concept of Earnings Per Share (EPS) and are happy with the stocks they own that have the ability to grow earnings. AFG’s Economic Margin methodology shows us that earnings are important but are not sufficient to properly measure a company’s operations. AFG looks past earnings to evaluate the profitability and growth (wealth creation) of the entire operation of a business.
Economic Margin (EM) is defined as EM = (Cash Flow - Capital Charge)/ Productive Capital. In simple terms, EM seeks to measure the ability of a company to make money in excess of a risk-adjusted cost of capital. AFG used a multifactor ranking system that combines series of scores to determine a winner in each state. The system evaluates the ability of companies to sustain their historical Economic Margin performance, forecasts expected Economic Margins benchmarked against their peers, and systematically grades management. Based on those criteria, AFG has selected 6 good companies from each state.

However, if you consider investing in any of those companies, please note good companies are not always good investments. There are two components to look at for any investment: the ability of a company to create shareholder value and the attractiveness of its share price in the market. There are times when a well ran business that creates wealth is not a great investment. Investors must understand the embedded expectations they are paying for that performance and determine if those expectations are realistic for the company going forward.


*Assuming a constant 5 year median EBITDA margin for each company.
*Assuming a constant 2007 EBITDA margin for FSLR.
Generally speaking, companies with pessimistic VE sales growth relative to their 5 year median sales growth are considered undervalued from AFG’s perspective, such as PETM, RRR,FCX, APOL from Arizona, and ABC, UGI, CEPH, from Pennsylvania.
And the winner is....

Cephalon Inc (CEPH) -CEPH has been a very profitable company in the last three years with very stable economic margins, much like the Pittsburgh Steelers who won the Super Bowl just three years ago. Based on AFG’s forecast, it appears that CEPH is in position to maintain its economic profitability while continuing to grow its assets.
First Solar Inc (FSLR) – FSLR is a solar module designer and manufacturer located in sunny Arizona. Helped by the growing public attention and support to alternative energy, the company has done a nice job of turning their business around from earning below their cost of capital to a high level of profitability.






For the past 26 years Steven Halpern, editor of thestockadvisors.com has gone to well known and respected advisors once a year to find out which stocks they like for the coming year. Take a look at the list of stocks advisors liked in 2008 and their performance. Also listed are the picks of 75 prominent advisors for 2009 along with sales growth expectations for the companies to justify their current price (VE Sales Growth) which can be compared to what they have delivered in revenue growth over the past 5 years(5 Year Median Sales Growth). These companies are worth a look because they are in favor of well-respected advisors, but the companies that also have low expectations for sales growth priced-in to their stock are especially worthy of a close review.



* denotes # of years historical sales numbers available
VE Sales Growth calculated for these firms on 1-6-09






Value Expectations: Invesment Insights by The Applied Finance Group
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