by Travis Johnson, Stock Gumshoe | February 13, 2017 1:01 am
This article first appeared on October 24, 2016, but readers are asking about it now so we’re re-publishing it for your information. The commentary below has not been changed, the ad is still running and also appears unchanged, and the company that’s being teased is down about 10% in the 3-1/2 months since we first de-teased the ad. Enjoy!
James Stafford at OilPrice.com is getting into the “crazy hyperbole” business as he promotes their new subscription service, Energy and Resources Insider ($49 “on sale” for charter signups), and several readers have asked me what he’s hinting at.
And I can see why, the promised “Unlimited FREE Energy Transformation” the ad talks about sounds awfully compelling, and it’s built on both a trend we’ve all seen (more solar installations) and a “secret” compound that can replace the current silicon solar cells and “transform an industry.” So are you dying to learn about that “secret?”
Don’t worry, we’ll dig in and see what we can see … and yes, we’ll ID the company for you after we sift through the clues that Stafford provides. Let’s jump right in, here’s the part of the ad that caught my eye:
“Scientists and engineers have been trying to squeeze profitable energy out of silicon solar cells for 62 years.
“What they’re starting to realize is… as you’ll see in a moment… that’s never going to happen.
“When it comes to extracting energy from the sun – profitably – silicon is just not up to the task.
“Unfortunately, as things stand today, 90% of the world’s solar cells are made from silicon.
“But here’s where things are about to change in a big way…
“There’s a new element – what I’ll call a ‘super crystal’ – that will soon replace silicon, and transform an industry.”
That was new to me, so I went digging to see what this “super crystal” might be… here’s a little more about that:
“As the scientists at Lawrence Berkeley National Laboratory put it, this ‘super crystal’ has facets that ‘behave like billions of tiny solar cells, all connected in parallel.’
“MIT Technology Review says it will ‘far outperform silicon’.
“The World Economic Forum calls it a ‘wonder material’…
“Adding that it will, ‘transform the lives of 1.2 billion people.'”
So what he’s talking about there are Perovskite crystals, which have the theoretical potential to reach something like 30% efficiency in transforming sunlight into electricity according to this article (though that same article says “in development” Perovskite solar panels are at 20% efficiency)… and yes, that top end would be better than typical silicon solar cells — right now the “world record” for silicon-based solar panels is 24% efficiency, and several of the top companies can put out high-end panels that have 20-24% efficiency with various different techniques and technologies.
These Perovskite crystal cells can be made to be much thinner than conventional solar panels, and made more c cheaply with common materials, we’re told, and the maximum theoretical efficiency is much higher — so there seems ample reason to be testing out this newer Perovskite technology.
But what does that mean for us investors? Well, that’s when we get to the good part…
“There’s one little-known company at the center of it all…
“Right in the middle of what Navigant Research predicts will be a $134 billion market by 2020.
“Now, I just got word that no less than six executives at this company are using their own money to buy their company’s stock at market.”
And the ad shows an image, which looks to have been clipped from the Nasdaq’s data pages, listing the insider purchases by several directors and officers in this stock in February, April and May — which will give the Thinkolator a little something to chew on. That indicates that the stock price was in the neighborhood of $14 to $15.50 or so for at least a little while during those months, as well as giving us some specific trade details to confirm.
And, we’re told, this company’s next quarterly release is “just a few days away” — so you have to “act before it’s too late.”
“You see, early investors in this under-the-radar company have a chance to get a whole lot richer…
“By our conservative research estimates: 20,280% richer.
“That’s enough to turn $10,000 into $2.02 million on a single trade.
“There’s no bigger prize in energy than harnessing the FREE unlimited energy of the sun.
“Solar companies have been trying – and have failed – to fulfill on this promise for decades.
“But they’ve been held back by silicon.
“For the first time ever, that’s about to change, and this one small company holds the key.”
OK, so we’ve got some insider purchases, a stock in the solar business, and some connection, apparently to this new Perovskite crystal design for possibly newer and more efficient solar panels.
Here’s more of the hyperbole:
“Silicon solar cells… after 62 years of research and development…
“Have been squeezed to their electrical limits…
“They are still too expensive to produce… they’re woefully inefficient once they’re in place…
“And, after all this, without subsidies they are not profitable for the companies that manufacture them.
“In short: Solar as we now know it will soon be dead.
“But you see, the world wants and needs solar…
“We just need something better than silicon.”
Is this really true? Is the Perovskite crystal going to do to the silicon solar cell what the microchip did to the transistor? I would imagine that’s putting the cart a few miles ahead of the horse, but here’s a snippet about that efficiency weakness:
“At silicon’s absolute theoretical limit… it can convert 23% of the sun’s light in to electricity.
“But it took us 62 years to get anywhere close to that.
“The very best commercial thin film solar cells now convert just 20% of the sun’s light in to electricity.
“And until a few months ago, silicon was the best practical material we’ve had to convert the sun’s energy in to electricity.”
And we’re told that it took decades for Silicon to become 20-25% efficient in solar cells (the first solar cells were developed in the early 1960s), but that these “secret” Perovskite crystal-cells have leapt from 5% to 25% efficiency in just a couple years, and may shoot higher much more quickly.
I’m not sure this efficiency talk is entirely accurate, though perhaps the physicists in the audience will chime in — there is a theoretical limit for the efficency of photovoltaic cells, the Shockley Queisser Efficiency Limit, which is based on a formula that I don’t understand… and it’s really a theoretical single-panel, simple cell, pure and unconcentrated sunlight limit. Much of the reported super-efficient solar cells that you hear about from labs are based on multiple layers of solar cells within a panel to increase efficiency, or on multi-material panels, heat harvesting, sunlight concentration with lenses or mirrors, or other strategies to get beyond this theoretical limit — and there are lots of different materials that are used both in conjunction with silicon and in place of silicon that offer either increased efficiency or decreased cost or some other benefit.
So I can’t solve that for you, I just don’t know — it looks to me like these Perovskite crystal cells are a long way from becoming commercially competitive with silicon, just given the huge manufacturing head start that silicon has, but perhaps there really will be a rapid breakthrough, I don’t know. There’s an interesting quick article about Perovskite crystals as a breakthrough technology in Scientific American here, and there are some folks, like Lux Research, who believe that there’s a chance we’ll see meaningful commercial production within five years as academic researchers spin out their work to startups.
And, of course, I’m sure that there will be some of those startups or Perovskite researchers who end up being publicly traded companies… and those are bound to be the subject of plenty of future “teaser” ad campaigns from whatever newsletters are still around by then (and hopefully your friendly neighborhood Stock Gumshoe will be around to give some perspective). But as of now, there isn’t a commercial Perovskite crystal solar panel business… so what the heck is James Staffords talking about in his ad?
Back to the spiel:
“Let’s talk about this ‘super crystal’ company at the center of it all…
“This one little-known company that could soon dominate the $134 billion solar market…
“… what we’re looking at here is a company that could rise 20,280% by capturing just 1% of the advanced energy sector…
“Getting in now would be like going back in time and grabbing absolute ground floor shares in Standard Oil…
“Where just 1 share would be worth $119 million today.”
Huh? Any more clues?
“There’s one publicly traded company…
“Trading for around just $10…
“That could change it all.”
And then a bit about what this company is doing right now:
“Few analysts cover the company, but the consensus was a 2-cent loss per share this quarter.
“The actual result? They shocked the market with a 27-cent PROFIT per share.
“Our intel is telling us that they are quietly expanding a portfolio of projects, including providing electricity for at least…
– Public school districts in California
– One of the largest upscale retailers… with 770 stores… in the world
– Ten campuses and up to 244,000 students in the University of California public college system.”
And then he drops discussion of this magical crystal and goes into the “completely new business model” that this company is testing:
“FREE solar installations.
“No up-front costs.
“So they could charge HALF and still be insanely profitable.
“And we’re not talking about this as a test… or some sort of testing phase.
“We’re talking about LIVE testing of this business model.
“They are generating revenue.
“So why would they give away solar panels?
“Simple: For long-term rental agreements at a price much lower than the local power company.
“It’s a win-win for both parties.”
That doesn’t sound all that revolutionary or new, we get people calling us every week offering “free solar installations!” — what they’re usually selling is a PPA, a power production agreement, whereby they install solar panels on your roof and sell you power at a (hopefully much lower than your utility) rate from those panels while they’re working, they collect the tax credits and manage any net metering benefit, and then the panels are turned over to your ownership after 20 years or some other period of time (there are also loans, leases, and lots of other variations on this — many solar installers, including all the big players like SolarCity, SunRun, Sungevity, etc. will put panels on your roof at no up front cost to you, but there is no such thing as “free”).
And then the ad uses a very familiar tactic — they use what sounds like a tiny number to make what is, in reality, a wildly optimistic prediction about a company’s growth potential:
“Let’s say this company captures just 1% of the entire electricity market of the United States…
“One country. One percent.
“Each year, according to the US Energy Information Administration, power companies in America rake in $31 billion in revenue.
“That’s $14 billion for residential electricity… and $17 billion for commercial.
“A 1% cut of that is $310 million in revenue per year.
“A 10% cut… $3.1 BILLION PER YEAR.
“That’s a 4,836% INCREASE in revenue for this tiny company.”
And apparently you’d only need to “paint” or “wrap” one out of every 25,000 buildings to get to that $310 million in revenue per year — gosh, doesn’t that sound easy?
The 20,280% increase they use in their headline? That would be taking 1% of the global market for electricity and hitting revenue of $13 billion.
It’s not easy, of course… nor is it really fathomable in the near term for any solar power utility (and that’s what this would be, a solar power plant owner — if they own the panels and sell the power they’re a solar utility company… whether those solar farms are rows of giant panels in the desert or networked rooftops across a state), but let’s see who it is that Stafford is hinting at.
“Remember, this is a small company.
“We’ve tracked one executive who has a $59,000 a year salary investing $73,000 in his company.
“Another executive takes home $61,500 a year… but he’s invested in this company four times over the past few months.
“We’ve tracked at least three more insiders like this going ‘all in’ with personal money.”
Thinkolator results, please!
We had to go back to those clues about insider buying to confirm, partly because the Perovskite claims were so over-the-top, but here we go: This is 8point3 Energy Partners (CAFD), a solar power yieldco.
Yes, that’s right — this is not a solar power innovator, or a company behind some hot new technology in commercializing Perovskite crystal solar panels, this is a limited partnership formed by SunPower and First Solar to own solar installations.
That term “yieldco” is going to make some people feel a little queasy, it was first popularized when David Einhorn and other hedge fund types were trying to get SunEdison to spin out their valuable, long-lived solar farm assets (and the power supply contracts based on those assets) into a separate company so that the long-term stability of those assets could be turned into dividends, for which investors are perennially willing to overpay. That led to even faster ramp-up of installation growth and even more debt at SunEdison, which led to bankruptcy for SUN and lots of sadness for unitholders of the yieldcos that SunEdison created, including Terraform Power (TERP) and Terraform Global (GLBL)… both of which have so far survived and are paying big dividends relative to current share prices, but are also down at least 50-70% from their spinoff prices (and down much more than that from their peaks). I don’t know what their litigation status is now, but the yieldcos have also been involved in the lawsuits over the SunEdison bankruptcy (both suing and being sued, I think).
So you can think of it as being kind of similar to the oil companies selling off their pipelines into master limited partnerships, or the telecom companies selling their towers into tower-owning REITs, I suppose — long-term revenue-generating assets get more visibility and more credit for being stable if they’re by themselves, especially if they generate cash flow that can be pushed right through to shareholders in the form of dividends… though in this case, they’re not even really selling off an operating or controlling stake, it appears that 8point3 consistently buys 49% of these projects so they really are just a junior financing partner.
It’s no coincidence that 8point3 chose the ticker symbol “CAFD” — that stands for “Cash Available For Distribution,” a non-GAAP accounting term that is one measure of the cash flow that they can generate for shareholders after subtracting required costs like any recurring capital expenses (maintenance of the solar arrays? Not sure what those costs might be)… it’s similar to the way REITs report their ability to pay dividends, since “income” isn’t as meaningful to dividend-focused shareholders as “cash in pocket.”
“Income” comes after you deduct important things like depreciation and amortization… REIT holders don’t generally care about depreciation because real estate is more likely to appreciate enough to absorb some capital investment needs in the future (renovating a building, for example), and they often don’t care much about amortization because they think they’ll be able to keep refinancing their debt. Perhaps solar farm owners should care a little more about depreciation, because solar panels will degrade and generate less power over time, and it could be that the land the panels are on isn’t owned by the solar utility, or that the land has no other value, but I can’t claim any great expertise on that. Solar installations are not generally expected to “poof!” stop working at year 18, but the “rule of thumb” I usually see is that panels will degrade by about 1% per year.
But anyway, yes, this is a simple yieldco — it may be one of the more appealing yieldcos out there in the solar space, I’ve seen several pundits opine to that effect, but it’s still a yieldco… they buy assets from their general partner parents, they own a share of those assets, but they don’t really have any employees or anything else, they’re just financing partners. They sell yieldco shares to the public with an implied dividend yield, and they borrow money based on the predictability of their long-term power purchase agreements with utilities, and that money is used to buy more power plants that are built by their general partners (First Solar and SunPower), and the general partner continues to operate and manage the solar plant and charge a management fee to the yieldco.
And I wouldn’t get too excited about that insider buying that was a big part of the teaser ad — there have been a couple real purchases over the past year, and the insider buying teaser hints in the ad do match CAFD’s records exactly, but the vast majority of that “insider buying” is actually the compensation plan for the Board of Directors: Directors of the yieldco who are not also employees of either SunPower or First Solar are each paid $75,000 a year for their service, and payment is made in the form of yieldco shares once per quarter, so that’s why you’ll see several “Acquisition (Non Open Market)” form 4 insider filings at the end of February, May, August, etc. Those are Directors getting paid. It looks like CAFD employees don’t really get paid, since they’re also employees of either First Solar or SunPower and draw their salary and benefits from one of those parents (and have that offset by the management fee paid by 8point3), but a couple of them have made small insider purchases over the past year. Those purchases may be much larger than the compensation they get from CAFD, as is noted in the ad, which makes them seem consequential, but they’re probably much lower than the compensation they earn from their “real” employer (SunPower or First Solar).
Which isn’t to say that CAFD is a terrible stock, or that it won’t grow as they buy more “drop down” stakes from their general partners — they are off to a decent start, they have ramped up to what looks like a reasonably sustainable level of cash flow from the megawatts that are already operating to pay out a growing distribution to unitholders, and they seem to have a pretty decent pipeline of assets that they can keep buying into.
Last year in their initial presentations (now up on their site as the “Company Overview”) they laid out a minimum quarterly distribution that they intend to hit, and without which there will be no room for growing to hit the incentive distributions that would be due to the general partners at higher growth levels, and they have already grown the distribution pretty significantly so the distribution is already bout 15% higher than the minimum — they have forecast that this growth will continue in the fourth quarter, when they expect the distribution to be 24.9 cents per share, so that would be a 6.6% forward yield if we assume that the distribution does not continue to grow.
They also did an equity rase just last month to help finance more drop-down acquisitions, so it seems reasonable to expect that they will be able to grow the dividend each year — I don’t know if the dividend will always grow by 15% a year, which is about the rate they’re hitting now, but there should be enough pipeline to let it grow… and the sponsors are incentivized to keep making solid deals with CAFD, since they get the general partners incentive distributions if and when the growth hits that level.
This is a financing company, so it has a fair amount of debt and will depend on pretty constant access to both equity markets (to sell more shares) and a reasonable credit line (to borrow more money and get a little leverage) in order to keep growing — they can’t grow the distributions meaningfully unless they keep increasing the gigawatts they “own” in these solar installations being built by their partners, and they can’t buy those assets without a source of capital. Like most REITs, they can only grow their cash flow in a meaningful way by getting more money to make capital investments, since they distribute essentially all of their income to shareholders each quarter (they can’t reinvest their cash flow, in other words). So the biggest risk I see, other than some abrupt end to solar tax subsidies or bankruptcy by First Solar or SunPower (which seems unlikely currently), is that if the market crashes they might lose that access to debt and equity financing and might not be able to grow their revenue or their distributions.
And the Perovskite connection? There isn’t one, as far as I can tell, so presumably that’s just a hyperbolic pipe dream about “solar gets much better with Perovskite panels, people love it even more, solar farm companies expand and make even more money.” I wouldn’t spend any more time pondering that nebulous connection.
SunPower is the leader in high-efficiency silicon photovoltaics, First Solar is the leader in thin film Cadmium Telluride (CdTe) photovoltaics. Neither is a meaningful investor in Perovskite research to my knowledge, though it’s certainly possible… and it will be quite a while before the Perovskite solar cells make it into the mainstream and reach a level of marketplace acceptance that lets them get built into large solar farms that are expected to have 20-30 year operating lives (or longer). 8point3 is not the owner of any technology as far as I can tell, and is not an innovator or game-changer in the solar space, it’s just a yieldco junior partner that owns junior shares in a growing portfolio of solar power plants.
So… go forth and researchify if you like, but remember to compare 8point3 not to some breakthrough 20,000% high-tech gainer that you might imagine, but to actual renewable energy yieldcos like Transalta Renewables (RNW.TO), Atlantica Yield (ABY), NextEra Energy Partners (NEP), Hannon Armstrong (HASI), Terraform Power (TERP), Terraform Global (GLBL). From what I can see CAFD is seen as on the riskier end of that group, but that’s just based on the fact that it yields 6.5% instead of the 4.5% yield that NextEra Energy Partners currently shows… each of them owns different things, with different balance sheets, different partners and different long-term contracts or potential.
And that’s about all I’ve got for you today… if CAFD can continue to increase the distribution each year at about the same pace as they’re doing now (which implies that they can get funding at a decent price to buy pretty much all the projects that they have “right of first offer” on from their partners), and if interest rates don’t rise too dramatically from here, then the shares should have the potential to grow at perhaps a slightly faster rate than the dividend increase rate (since age would connote stability, and if investors in the future grow more confident in the dividend/distribution growth they’ll probably be willing to accept a lower yield). Expecting anything greater than that, which would still be a nice ceiling of 15-20% growth, is pretty crazy… and there are plenty of reasons, including rising interest rates or regulatory changes or the relatively untested nature of this business model in the stock market, to keep your expectations even a bit more in check than that.
P.S. Back to February now…
I did just check, and CAFD’s total return of negative 7.57% since this teaser stock was first ID’d back on October 24 is not the worst in its peer group — the worst is the 13% loss posted by Hannon Armstrong and Terraform Power… but it’s also far from the best, NEP, GLBL and ABY have all had decent mid-teens returns since then, and TransAlta Renewables has broken even… here’s the chart, just FYI:
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