Don't Discount This Stock
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
First Solar (NASDAQ: FSLR) has been seeing a lot of cloudy days in recent months. The stock has been slowly meandering upward from a 52-week low of $11.43 in June. Recently, First Solar was reiterated by TheStreet Ratings as a sell because of weaknesses in many areas, such as its net income, return on equity, weak operating cash flow and weak EPS growth. On the basis of changes in net income on a year-on-year basis, the company has significantly underperformed the S&P 500. Does First Solar have anything left in the tank for investors?
First Solar's net income has declined significantly by over 55% falling from $196.51 million to $87.92 million. Return on equity has decreased greatly when compared to the same quarter of 2011. Compared to other companies in the Semiconductors & Semiconductor Equipment industry and the overall market, return on equity trails that of both the industry average and the S&P 500.
First Solar has announced financial results for the third quarter of 2012. Net sales were $839 million, a decrease of $118 million from the preceding quarter, and $167 million from the same quarter of 2011. The decrease in net sales from the second quarter of 2012 was specific to projects, including Silver State North, which was completed in the second quarter, as well as reduced construction activity at Agua Caliente, consistent with the company's planned construction schedule. The decrease was partially offset by initial revenue recognition for the 550-megawatt Topaz Solar Farms project, where construction commenced in late 2011.
The United States International Trade Commission has voted In favor of double and triple digit duties on billions of dollars of solar-energy products imported from China for the next five years. This decision will protect U.S. producers of solar products from the low-priced Chinese products that were murdering the U.S. industry. The decision came in response to a complaint brought by SolarWorld (SRWRY) which is the largest solar panel producer in the United States.
This decision will provide companies like SolarWorld and First Solar some breathing room to recover from the ravages of the Chinese onslaught. This decision will be particularly hard on Trina Solar (NYSE: TSL) on a Chinese based company with a strong cash position. The company had been withholding $13.7 million in cash that it expected to pay as back tariffs, but the U.S. International Trade Commission did not order back tariffs to be paid.
Just like Trina, Yingli Green Energy (NYSE: YGE) is potentially a big loser from the Commission’s decision. However, both companies say they remain committed to the U.S. market and will adjust by reconfiguring supply chains because the Commission’s ruling only applies to products made in China. Both companies have the resources and the ability to do so though they already have high levels of debt though I would guess that the Chinese government would continue to support them. Another Chinese company that says it remains committed to the U.S. market is Suntech Power (STP).
The company's strategy to boost its global presence and establish its position in the potentially lucrative emerging markets of India and Australia are positive signs for high revenue growth. Over the last two quarters, the company has established itself in the sustainable markets of Dubai, Thailand, India, China and Australia and this will enable it to take advantage of the growing demand for solar power. In the pursuit of this objective, First Solar has been aiming to bring superior services to its customers and a recent development of its Grid integration System is a milestone in creating strong bonds with customers. An efficient solar power supply system, with voltage regulation, fault ride-through and active power control system provides electricity to utility companies in the most efficient fashion.
Because of the focus on utility scale solar projects, both from a technical and business perspective, First Solar is definitely a leader in the space. Some of its more notable utility buyers include Exelon (EXC), Enbridge (ENB) and Berkshire Hathaway's (BRK.A) Mid-American Energy Division. Currently, a little more than half of First Solar’s revenues are derived from these utility scale projects, whereas many of its competitors obtain a substantial part of their revenue from solar panel sales. There is little doubt that this is a far more stable and reliable source of revenue.
I believe that despite the dependence on government subsidies, solar power has a definite role to play in the scheme of things. If you have confidence in the future of solar power, First Solar looks undervalued, particularly in view of the five year protection against the Chinese competition, and I would recommend First Solar to investors looking at the solar space.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of First Solar. Motley Fool newsletter services recommend First Solar. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!