Investing In Solar Power’s “Picks, Pans And Shovels”

Last week, for the first time since I started writing here, I wrote a positive piece about solar energy. I picked two companies, First Solar (FSLR) and Canadian Solar (CSIQ) that I believed could benefit from a general upturn in the solar energy sector. Over the last week they have gained 4.55% and 10.89% respectively; so far, so good!

It is nice to see that short term pop in both stocks, but the selections were really based more on a long term belief that the industry is about to turn after several years in the doldrums. That downturn was caused in part by oversupply in the solar business. As supply has slowed to restore equilibrium in the supply and demand equation, prospects for companies in the sector have improved. The downside to that has been the effect on businesses that supply the industry.

Amtech Systems (ASYS) would be a case in point. In fact, Amtech, who manufacture parts and systems for the solar power and semiconductor industry, got hit on two fronts. Just as oversupply affected their business supplying solar power companies, so the same dynamic hurt the semiconductor industry. They went from consistent profits to consistent losses, seemingly overnight. Earlier this month, as those losses came in at over twice the consensus expectations, the market finally lost patience and the stock tanked.

Figure 1: ASYS 3 Month

Hidden in that disastrous quarter, however, was some good news; orders were up 125% on a year to year basis, largely due to improvements in solar. It would seem that the bad times are drawing to a close.

ASYS appeals to me as an investment because I am a big believer in the old investing adage that one should always look at "picks, pans and shovels". In the gold rushes of the past, so the logic goes, picking winning prospectors was hard if not impossible. Some would strike it rich while others would go broke. The only sure fire way to make money off of a boom was to invest in the companies that sold them the tools of their trade, the manufacturers and suppliers of picks, pans and shovels.

If my analysis is correct and the solar energy business is set for a period of resurgence it is likely that First Solar, Canadian Solar and the like will do well. It is, however, certain that, in that event, ASYS, as a principal supplier of the industry's picks, pans and shovels, will do well. I am quite prepared to take a chance on a likelihood, but would far rather have a certainty to back that up if one exists.

If ASYS had never made any money, then I would be less optimistic, but that isn't the case. They have a history of profitability, having made money in every year from 2005-2011 except for 2009 at the depth of the recession. The weakness since 2011 is the result of cyclical weakness in the two main industries that they supply coinciding.  Both, however, have begun to swing back at the same time. A return to 2011 EPS of $2.34 is unlikely, but a gradually improving picture could well result in positive cash flow before the end of the year.

I still like both FSLR and CSIQ as ways to play the solar power business, but, as always with individual companies, there is some execution and other risk. CSIQ in particular is quite heavily indebted, so any significant change in the interest rate environment could have negative effects. Given that, using a stock like ASYS as a core holding to play a cyclical recovery in solar power makes sense. Even if individual companies face some problems, the industry as a whole, anticipating a recovery, will be buying a lot of picks, pans and shovels.