Which Solar Stock is Set to Soar?
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Two events last week gave U.S. solar energy companies good news. First, on Tuesday President Obama was re-elected for a second term. Many believe President Obama is a better advocate for green energy than Governor Romney would have been. Second, on Wednesday the U.S. approved new tariffs worth billions of dollars on Chinese solar panel imports. The Chinese government has provided solar panel manufacturers with huge subsidies, allowing them to undercut U.S. manufacturers’ prices. This has caused a lot of downward pricing pressure and a decrease in revenues for U.S. solar energy companies.
One of the leading global providers that I believe will benefit most from these two events is First Solar (NASDAQ: FSLR). It’s hard to believe that it wasn’t too long ago that this company’s stock traded for well over $100. Now trading around $26 with a catalyst to move things forward, I see this price as an excellent entry point for investors.
Covering the World With Solar Panels
First Solar is a leader in solar energy technology in the United States. Recently, the company has leveraged that into global expansion. In the last two quarters, First Solar has further established itself in several key emerging markets such as India, China, and Australia. Increasing its exposure in high growth markets will allow the company to improve both its brand equity and its revenue numbers as it takes advantage of the increasing demand for solar panels all over the world.
More Than 1.21 Gigawatts In The Pipeline
In First Solar’s most recent earnings report, the company revealed that its pipeline projects grew about 3.5% from 2.9 gigawatts (GW) to 3.0GW in the last quarter. Management iterated that it expects to maintain that level of pipeline margins in the future. With its entry into growing markets, I believe pipeline projects will continue to grow.
The earnings report from Q3 also showed the average cost per watt declined $0.05 from Q2 to $0.67. Last year, the company revealed a new cadmium telluridesolar cell that was 17.3% efficient. While less efficient than silicon panels, that’s a record for the thinner, less expensive photovoltaic (PV) cells. The average First Solar panel converted energy at an 11.7% clip last year. The company intends to raise that number to about 14% by the end of 2014.
First Solar specializes in PV solar panels, which sell at higher margins and face less competition. This is quite evident when comparing gross margins to companies that produce silicon panels. First Solar posted a gross margin of 28.4% last quarter. Meanwhile, silicon panel-producing competitor SunPower (NASDAQ: SPWR) posted a gross margin of just 12.4% in the same period. Chinese competitor Suntech Power Holdings (NYSE: STP) posted a gross margin of 12.3% last year. Typical silicon-based panel producers post gross margins between 10% and 15%.
First Solar currently trades at a forward P/E of about 6, resulting in a PEG of 0.21. Its price to sales ratio comes in at 0.7 and price to book is 0.6. These are all great numbers on an absolute basis, but it’s important to compare these numbers to the competition.
SunPower trades at a forward P/E of 20.35 and a PEG of 1.02. However, price to sales comes in at just 0.24 and price to book is 0.49 for the company. The company is smaller than First Solar, and thus has higher growth potential. Despite the company’s excellent growth prospects, those numbers seem priced in already.
Suntech Power has no forecasted earnings. It sports miniscule price to sales and price to book ratios of 0.06 and 0.21, respectively. Another small company with good growth prospects, the big concern with this company is in its balance sheet. It sports a huge amount of debt, and a debt to equity ratio of 2.84. The company, based in China, may see a decrease in subsidies as China finds it hard to compete in the U.S. with the new tariffs.
First Solar sports an excellent balance sheet. It has a nice pile of cash, with $8.24 per share giving it a cash to debt ratio of 1.16. It’s minuscule 0.15 debt to equity far outshines its competition. (SunPower has a D/E ratio of 0.72.) Current and quick ratios are good as well at 2.4 and 1.8, respectively.
First Solar outshines the competition in terms of valuation and business environment. With a second term for Obama and the recently enacted tariffs against Chinese manufacturers, I believe the company is set to make a turn around and start heading higher in earnest. Its global expansion, pipeline of projects, and industry-leading PV panel efficiency all provide competitive advantages for the company.
Another thing to note here is that as the stock price gains momentum, the large number of shorts will cover their position. This will push the price through the roof. Buy in now before that happens.
Know Which Stock Shines
Investors and bystanders alike have been shocked by First Solar's precipitous drop over the last twelve months, and now the stakes have never been higher for the company. Are they done for good, or ready for a rebound? If you’re looking for The Motley Fool’s recommendation on how to approach investing in First Solar, along with continuing updates and guidance on the company whenever news breaks, the Fool has created a brand new report that details every must know side of this stock. To get started, just click here now.
adamlevy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend First Solar and Suntech Power Holdings Co., Ltd. . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.