Tuesday, July 3, 2012

Real Goods Solar (RSOL) -- Delivering the Goods

Real Goods Solar­ (Nasdaq: RSOL $1.15) is a leader in solar energy engineering, procurement and construction (“EPC”). The company designs and installs residential and commercial solar arrays, using photovoltaic equipment from top manufacturers. This equipment is purchased directly from the manufacturers, unlike many of Real Goods’ competitors, which buy from third-party dealers at a higher cost. In addition, the company offers several other services, including obtaining permits, grid connection, and helping customers to find financing for a project.

The company’s residential and commercial installations normally generate between three kilowatts (“kW”) and one megawatt (“MW”) of electricity. If bought outright, a residential array costs between $10,000 and $30,000. It’s a substantial investment up front, but the system will generate power for 10%-30% less than what fossil fuel utilities charge. Certain customers also qualify for financing or system loans to ease the cost of installation.

Sales are hampered by the struggling economy. There is a lot of interest in solar energy, but potential customers are reluctant to carry through with a solar project because of economic uncertainty. Demand for solar looks like it should increase in the next few years, though. Half of United States power plants are 30 years or older, and many plants run at or near capacity during peak hours. The increased demand and aging infrastructure translate to higher costs for consumers. Utility companies will have to build new plants to reach the rising demand, which could further drive up prices. Coal reserves are estimated to last about another 100 years, but higher demand will burn resources more quickly. Also, coal may be the cheapest fossil fuel, but it’s also the worst for the environment. Real Goods and other solar installers can’t overlook natural gas, though, which is cheaper than solar and much cleaner than coal. 

Real Goods installs only in the United States, primarily in California and New Jersey, with the remainder in other Northeast states and Colorado. Sales are achieved through the company’s reputation and by word-of-mouth referrals from previous customers. Once a potential customer is identified, company sales representatives engage in thorough telephone interviews to decide the optimum setup for a customer. Customers range from 30 to 65 years old, and tend to be just as interested in the environmental benefits of solar power as they are in cost reduction. Once a contract is signed, the process takes 60 to 90 days to complete, with installation taking only two or three days. The rest of the time is spent obtaining buildings permits and have building sites inspected. 

Like most solar companies, Real Goods’ sales fluctuate seasonally. The first quarter is the slowest, because the systems can’t be installed in winter or other unfavorable weather conditions. Real Goods’ highest sales historically have come in quarters three and four. Revenue grew 70% from 2009 ($64.3 million) to 2011 ($109.3 million), but earnings haven’t followed suit. Shares earned $.08 in 2010, but the company has posted losses every other year. We estimate shares will lose $.05 in 2012, despite a projected 19% revenue gain to $130 million for the year. However, an EPS in the range of $.10 and revenues around $180 million seems reasonable for 2013. Tax credits in the United States were extended through 2016, and there is no longer a $2,000 credit cap. A handful of states have legislation that makes solar even more appealing, which could lead to other states adopting similar strategies and giving the company more potential customers. On June 25, Real Goods announced a deal with Canadian Solar (Nasdaq: CSIQ) for the former to use up to 40 MW worth of the latter’s PV panels in installations. Real Goods also buys panels from Kyocera, Sharp, SunTech, and SunPower. Inverters are purchased from Enphase, SMA and others.

The company’s main competition comes from smaller, privately-held installation companies. Solar City is believed to be the largest.  Others include Sungevity, REC Solar, Verengo, and Namaste Solar Electric. Some of the smaller companies can charge customers less, but Real Goods has a strong reputation and 30 years’ experience in solar installations. 

Real Goods is located in Louisville, Colorado.

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