Swiss industrial giant ABB Ltd (ADR) (NYSE:ABB) (VTX:ABBN) surprised markets by announcing a deal to acquire solar inverter manufacturer Power One Inc (NASDAQ:PWER) for nearly $1 billion in cash. The offer price of $6.35 was a huge premium of 57 percent to Power One’s market price and it was natural for the stock to get a boost after the deal came in public light.

ABB expects the acquisition will start contributing to its profits within 12 months from here. These lofty valuations breathed some life in solar stocks which seem to be battered beyond recognition. However, the natural question is if ABB’s bet on the solar industry can be generalized for solar panel and module manufacturers.

Much to the chagrin of such companies, ABB Ltd (ADR) (NYSE:ABB) (VTX:ABBN) made it very clear that it has no intentions of getting into the low-value line of business even though it believes the solar market will see tremendous growth in future as electricity costs rise. Unlike solar panels, where Chinese invasion is more than apparent, solar inverters are complicated pieces of technology and are difficult to replicate. This means margins are higher and thus valuations are also much better.

Solar Industry

Apart from Power One Inc (NASDAQ:PWER) (in which the rally has played out), the beneficiaries of the transaction are likely to be companies such as Enphase Energy Inc (NASDAQ:ENPH) and Cree, Inc. (NASDAQ:CREE) which also enjoy from high barriers to entry. The industry is led by SMA Solar Technology AG – a German company – but has enough space for newcomers and small companies.

Even after the major boost recently, Power One Inc (NASDAQ:PWER) trades at a price earnings multiple of just 18. On the other hand, Enphase Energy Inc (NASDAQ:ENPH) is a small player in the space with a market capitalization of $239 million. The company sells its products through OEM’s, distributors as well as directly to installers. Enphase is a growth phase company and though it does not make profits as yet, it has been expanding reach to solar panel manufacturers and installers.

Recently, it has signed strategic partnership deals with panel manufacturer Vivint Solar and Cambio Energy for the latter’s Tempe Plaza Solar project in Arizona. Investors seem to be taking note of Enphase’s microinverter technology and have sent the stocks up 65 percent over the last 6 months. This is a remarkable turnaround for the stock after hitting a low in November. The company has a debt equity ratio of 0.2 and its stock is currently priced 24 times expected earnings next year.

Surprises down the value chain

North Carolina based Cree, Inc. (NASDAQ:CREE) is a surprise entry in this list as the company is better known as a LED player. However, Cree manufacturers a wide range of silicon carbide (SiC) based MOSFET’s which are used in solar inverters. These products form the company’s power products portfolio which sold goods worth a total of $22.6 million in the three month ended December 2012. Although this contributed only 7 percent of total revenues during the period, higher margins in these niche products effectively resulted in a contribution of 9.2 percent in gross profits.

The company states its MOSFET’s offer faster switching speeds than comparable silicon-based power devices for a given power level. This also means its products are priced higher and have limited market penetration but the business is nevertheless growing at a healthy rate (59 percent for the latest quarter and 23 percent for the six months). The downside with Cree is that its stock price may be a bit overvalued even at a forward price earnings multiple of 31 and cannot be considered a solar play.

All in all, the transaction is a resounding reminder that all is not lost on the renewable front. However, the gains are evidently limited and a broad brush approach of buying solar panel manufacturers is not likely to work. At least, it did not work for Siemens and Bosch which have recently ended their ventures.