The operating performance of solar companies has varied with revenue growth slowing as compared to the last few quarters, but still remaining robust with CAGRs of all four sectors exceeding 30% for the last three years. At the front of the supply chain, the EBITDA margins of Wafers/Ingots remain strong at approximately 20%, which compares to the margins exhibited in this sector for the last few quarters. Cells/Modules companies’ EBITDA margins have also remained consistent with previous quarters and have held steady at 13%. Vertically Integrated companies experienced the most significant increase in margins growing to more than 23% by the end of the first quarter of 2011. The Vertically Integrated model may be gaining some traction as this sector has experienced improving margins for the last two quarters. The only sector showing a declining margin profile was that of EPC Integrators/Developers with EBITDA margins declining to approximately 7% on average. The EPC Integrators/Developer sector will need some relief in the form of better tariff certainty in the global market, improved Power Purchase Agreement (PPA) rates, or the removal of other impediments slowing down project installations in order to curb the continued margin decline. Otherwise these companies will need to rethink their models in order to drive profitability through efficiency improvements, identify new areas of revenue generation or consider a merger or acquisition to enhance their overall strategy.

Risks & Positives

The current global energy environment certainly has characteristics that provide positive benefits to the solar industry, whether through increased oil prices or the uncertainty of nuclear as part of a larger energy portfolio. The attractiveness of solar companies and the market’s future growth expectations are driving improved financial performance resulting in increased stock prices and valuations. However, there is a risk of oversupply in the market with solar projects being delayed and the uncertainty that exists with overall tariff structures worldwide. While these risks exist, there are many potential positives that could help the continued growth and success of the industry, including markets such as China and India displaying significant potential to take over as major geographies for solar, decreases in solar system costs which brings the industry closer to grid parity and increasing pressure in the U.S. and abroad to improve and solidify incentive structures. 2011 started off strong, yet how each of these areas play out will ultimately dictate the progression of all companies within the solar industry.

Jack Calderon is Managing Director at Lincoln International (www.lincolninternational.com) and co-heads the firm’s Renewable Energy Group. Chaim Lubin is an associate at Lincoln International and a part of the Renewable Energy Group.