Tree hugging now turns junk bonds. In New York, where I live, the return on investment on home solar panels can exceed 7%. That is three points more than the ICE BofA High Yield Index pays out.
Just wait Panels are subject to the computer chip economy, so that the cost per performance unit has halved since 2010. According to the energy ministry, electricity costs for the grid have increased by 2.2% per year. Then again, maybe don't wait. There's a 26% government tax credit on home solar panels that lasts until the end of next year, then drops to 22% for a year, and then goes away.
Sure, it's a big government push, but my friends with the pickup truck and hunting rifle seem as interested in collecting it as my soy laths and sandals. “When we interview our customers, we find more Republicans than Democrats … which I don't think people find intuitive,” said Ed Fenster, co-founder and chairman of the board
Sun run
(Ticker: RUN), told me last week.
I'm not much into ethical-at-any-cost investing, but right before the pandemic, I listed five affordable stocks with an exposure to green power here. On average,
First solar
(FSLR),
NextEra energy
(NO),
Albemarle
(WHITE),
LG Chem
(051910.South Korea) and
Samsung SDI
(006400.South Korea), have since brought back 120%, up from 41% for the
S&P 500.
I should have included Sunrun who beat them all and returned 212%.
Ready for a sale? There has already been one. The
Invesco Solar
The Exchange Traded Fund (TAN), which tracks a basket of industry players, hit a high of over $ 120 per share in February but has fallen to around $ 78. Investors have feared that reopening the economy will drive bond yields higher, making solar financing more expensive and reducing the value of future cash flows from existing solar systems.
There were also bottlenecks. “The supply chain is a big issue for us now,” said Ben Catt, CEO of Pine Gate Renewables in Asheville, NC, which connects solar investors with customers looking for utility-scale assets. He says solar panels are less of a problem than a surge in steel prices and a scramble over shipping containers.
Sunrun's window says he's fortunately stocked up on supplies for tax breaks, but he's lacking batteries, which are a growing role in the solar industry.
Speaking of which, Sunrun has a deal with
Ford engine
(F) for its new all-electric pickup, the F-150 Lighting. Ford will refer pickup buyers to Sunrun to install garage chargers, and Sunrun will then turn those customers to solar power. The truck's battery can power a typical home for three days in the event of a failure, but it can also increase the home's power consumption by half or more. Solar is a natural solution because the additional cost of adding more watts to a project is minimal.
John Harrington / Sunrun
James West, an analyst at Evercore ISI, calls this the climate decade and says the rise of electric vehicles will help make solar power ubiquitous in the home. Sunrun is his first choice because of its size.
Buying Sunrun shares carries risks here. It is the market leader after buying the No. 2 player Vivint Solar last year. But
Tesla
(TSLA) comes up strong. After purchasing SolarCity in 2016, it led the market but then almost pulled out of solar power. Last year, Tesla reappeared with a different approach. While Sunrun has sales reps, buyers below
Home depot
(HD) stores and elsewhere, Tesla has next to no marketing. And while Sunrun consultants were customizing solar systems for customers, Tesla introduced four standardized options called small, medium, large, and extra large, with prices a third below the industry average.
Sunrun's window says he's watching Tesla's approach, but right now he's calling it “a self-service strategy” best for a “super-expert” who “does a lot of the work himself”.
If that's right, it seems like home improvement at least soon enough. In the fourth quarter of last year, Tesla would have overtaken Vivint in second place in market share if Sunrun hadn't already bought it.
Sunrun stock is definitely not for investors who prefer a low price-earnings ratio. The company is perhaps best known for its Solar-as-a-Service model, where customers spend little to nothing upfront and make a monthly payment to Sunrun, who owns the modules. Window says it can save customers 10 to 30% on utility bills. But it also means that Sunrun immediately charges high fees for devices that can generate revenue for decades, so the revenue is negative and can stay that way for years.
Sunrun, with a market value of $ 9.2 billion, closed the last quarter with $ 683 million in recurring annual subscriber revenue and an average contract term of 17 years. It calculates $ 4.2 billion in net earnings assets based on the present value of future customer cash flows, which is double what it was at the end of 2019.
Last quarter, Sunrun said it created $ 165 million by adding more than 20,000 new subscribers, valued at $ 8,197 each, after installation, sales, and other costs. Installations are expected to grow 25-30% this year.
There are many other ways to invest, including panel, component, and battery manufacturers. Last week, First Solar, a panel company, announced it was building a third U.S. factory in Ohio to double capacity by 2023.
For investors who don't want to try to pick winners, there is the Invesco Solar ETF.
Some investors have referred to the Group's recent equity volatility as the “Solar Coaster”. Long term owners should step up.
Solar calls Sunrun's window a five-decade long opportunity that, like any disruptive industry, will have “small ups and downs”.
Evercore's West says the price move is more exciting than it should be: “There are a lot of big moves for no reason because fundamentals aren't really changing like they are with oil and gas.”
Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and subscribe to his Barron's Streetwise podcast.