Kicking the Oil Habit: First Solar
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For a long time, the US elections were a nail biter. Polls put the two candidates neck and neck, despite the incumbent’s edge in early voting. Last night however, it became clear that Obama had attained a resounding victory, having claimed 303 electoral votes. In an emotionally charged acceptance speech, the President reaffirmed his commitment towards economic recovery and the needs of middle-class Americans regardless of race, creed, sexual orientation or appearance. A salient point in this speech was the President’s intention to end America’s dependence on foreign oil, a lofty goal perhaps, but a critical one nonetheless.
It is clear that the world’s economic dependence on fossil fuels must be addressed. Despite the rather good run we had with it, there is after all only a finite amount of oil, and one day the dead dinosaurs that power our cars and fuel our economy are going to run out. The question is not whether or not we must switch to alternative power sources, but when, and to which ones specifically. Some are more efficient and cost-effective than others, and it is up to the people in power to direct funds towards these alternative projects. One power source that has proven promising in some areas is solar power.
First Solar (NASDAQ: FSLR) was regarded by many analysts as an “Obama stock” due to the President’s commitment to finding alternative energy sources, and it indeed had a big pop in yesterday’s trading. First Solar is America’s premiere solar power company, and although the sector hasn’t had it easy in recent times, the stock is up almost 20% in the last three months. Headquartered in sunny Arizona, the company has a relatively modest market cap of about $2.16 billion. Obama’s win could spell further upside for this alternative energy provider.
Earnings and Valuation
While investing in alternative energy sources is to my mind a rare ideologically sound move in an investing climate that is, at best, morally ambiguous at the moment, it would be useful to back this up with some figures. The market reacted badly to the Q3 report, which despite beating EPS estimates missed big-time on revenue. Restructuring costs weighed on the firm’s income, and Superstorm Sandy disrupted its supply chains. Still, earnings are way ahead of competitor SunPower Corp (NASDAQ: SPWR), who reported an EPS of 3 cents over the 3rd quarter.
First Solar’s mixed-bag valuation raises a few questions. With a forward P/E of 5.5x earnings, the stock looks very cheap, but the industry is priced at only 3.5x forward earnings. It is still a lot cheaper than competitor SunPower though, which has a forward P/E of 31.2x earnings. With a price to book of only 0.57 and a price to sales of 0.65, the stock screams bargain, but has a negative return on equity of -1.12. Operating margin looks alright though at 14%, and the company has a manageable amount of debt with a LT debt to equity ratio of about 17.
Alternative energy is a young industry at the moment, and as such First Solar faces a number of risks. Government subsidies, upon which a large portion of the industry is reliant, have been cut in much of the developed world due in no small part to the ongoing economic crisis. As a result, First Solar has redirected its focus towards growing markets such as India and Dubai. Another issue is fierce price competition which has put pressure on margins and will continue to challenge the firm’s competitive edge in years to come. Yet, as power becomes more and more expensive, alternative sources should become increasingly attractive to consumers and investors alike.
Barack Obama has won himself four more years in the White House. What can be expected is that his victory bodes better for some industries than others, and that alternative energy is one of the areas that should do better under his leadership in the near-term. While First Solar faces a number of risks, and certainly hasn’t had an easy time in recent years, it looks like a strong bet under the current administration and is to my mind more than worthy of consideration.
The Big Picture
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.
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