First Solar

November 13th, 2009 by Potato

I don’t usually get too crazy about growth stories and tech stocks — despite being a scientist and fairly technologically-minded myself, I get turned off by the hype and the projections to the moon. I also first started learning about stocks in the midst of the tech boom, and was wisely steered clear of that trainwreck by my dad, who doesn’t believe in negative/imaginary P/Es (negative for a few quarters is one thing, but massive valuations for a company that’s never turned a profit is another).

However, I’ve had my eye on First Solar (NASDAQ:FSLR) for some time. I never bought any before now because the valuations frightened me, but it’s starting to look a little more attractive now.

First Solar is a manufacturer of thin-film solar panels. Solar, green, alternative energy — all buzz words for a hot sector, something I like as an environmentalist, but which actually turns me off a bit as an investor. First Solar is not a pie-in-the-sky startup though: they actually have several plants up and running, some long-term contracts, and are actually turning a profit whilst still in that early “parabolic” growth phase.

On the positive side, they have had a phenomenal growth track record, and have managed to reduce their cost of production while expanding. According to their annual report, they have 2 more production lines that are coming online over the next year or so, to bring them to a total of 24 — so from a volume standpoint they should have at least another ~10% growth in them. They also have very modest debt levels, and a US government that believes in climate change might help subsidize solar plants there. They are the low-cost producer of solar panels, and have focused on improving their margins through the years.

Piling up on the negative side are a number of worrying factors: FSLR depends on a very small number of power companies, all(?) in the EU for the vast majority of their business. Any issues with even one of their customers could trickle down badly for them. Indeed, government subsidies for solar power (esp. in Germany) may be critical to them making sales, and those policies may be on track to be phased out sooner than expected. While there is some advantage in thin-film solar for many applications, large-scale power plants really isn’t one of them — it’s largely just a cost issue. So their main customers have really only been buying due to the low price relative to crystalline solar cells. Recently, those have come down in price as the cost of high-grade silicon crashed (used, as I understand it, in both solar cells and microchips).

So FSLR could be facing some increased competition, squeezing their margins going forward, and depending on how long silicon prices stay low, that pressure could stay on for a long time.

I played around with my spreadsheets for a little while on this one, there are a lot of places to guesstimate how future earnings will play out. I figure the stock is worth anywhere from $60-$160 depending on what assumptions I make, but it does definitely have some value. I figured the most realistic assumption was that their earnings could continue to grow at 10-25% per year for another few years as their production volumes ramped up (even if cost pressures prevent them from significantly improving their margins any further), and after that would settle into a long-term growth rate of 5-7%. I also believe (hope, really) that demand for solar energy will pick up in the US to more than offset any declines from the EU as their subsidies are phased out. From that I get a value of (from memory, since like a genius I closed my spreadsheet without saving) ~$110/share. It was at $116 today, which I figured was close enough to get my fingers into the alternative energy sector, so I bought a few shares. It’s not enough of a value that I can recommend it to anyone (not that I ever make recommendations!), but with the recent pullback it seems to have shed that “hot thing in the news” over-hyped smell.

What are your thoughts?


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