Is The Time Right For This Solar Giant?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

My regular readers know that I am a big fan of solar power as a long-term solution to our energy needs.  With world energy consumption forecast to quintuple by 2050, there is no other energy source that can be implemented on a grand scale that is as cost-effective as solar is becoming. 

However, solar stocks have rallied very nicely from the lows of mid-2012 when all I read about was predictions of the bankruptcy of the entire solar industry!  While I concede that the solar industry is not viable quite yet without some kind of subsidies, conditions were not quite as bad as people were led to believe. 

Once this was realized, the most recognizable name in the solar space, First Solar (NASDAQ: FSLR) popped from its low of $11.43 all the way to the mid-30’s.  While I believe in the company long-term, for the time being, it may have come a bit too far too fast in my opinion.  When the company reports 2012’s earnings on Feb. 25, investors will get a nice update on the state of the industry and First Solar’s outlook on where it is heading.

The Company

Since going public in 2006, First Solar has grown its revenue very nicely (see below).  The company designs and manufactures solar modules using its proprietary thin film technology, and uses less than 1% of the semiconductor material needed to make crystalline silicon modules. 

The strategy of First Solar is simple: reduce PV (photovoltaic) system costs as much as possible, and they will be appealing to more customers.  First Solar’s manufacturing costs have steadily fallen over the years, and are down to $0.73 per watt as of the end of last fiscal year.  The manufacturing costs for 2012 are definitely worth paying attention to during the earnings report.  If these costs are still steadily decreasing, the solar industry will be able to stand on its own quicker.

The Solar Industry

The general consensus now seems to be that eventually solar will become a widespread source of energy.  With the bankruptcy of Solyndra, the industry got the reputation of being made up of small, unstable companies.  However, the solar industry in general is more popular and mainstream than you may think, as many of the “big boys” have been developing solar equipment for some time now. 

Two companies with particularly ambitious solar operations are General Electric (NYSE: GE) and 3M (NYSE: MMM), and these may actually be a good way to play the solar industry and ride out the uncertainty ahead. 

General Electric has offered solar products for utility, commercial, and residential customers for some time now.  In 2010, they announced that their solar efforts would focus on the thin-film PV market.  I’m actually very optimistic on GE’s solar efforts both because of its size (lots of resources to use in their research) and the fact that their products are backed up by GE’s immense customer service network, a feature that smaller companies cannot provide.

3M has been quietly producing solar films for almost three decades.  In 2009, the company formed a renewable energy division, aimed at nurturing 3M’s solar and wind divisions.  Just last year, 3M announced the construction of a new solar manufacturing site in China.  With companies of this scale getting involved, the technology may very well advance quicker than expected.

Valuation and Conclusion

At a glance, First Solar may appear cheap, but I think the valuation of the company is just about right.  As the company restructures its operations and reduces capacity, naturally earnings will drop for a period of time.  The company is expected to report $4.61 per share for 2012, and this is expected to decrease to $4.01 and $3.38 in 2013 and 2014, respectively, and earnings should stabilize once the restructuring takes effect.  However, the company has a strong balance sheet with more cash on hand than debt, so this should help the company maintain a good valuation.

So, while it may sound cheap that First Solar trades at just 7 times earnings, I think it’s pretty fair considering the uncertainty of the next few years while the company gets rid of its excess capacity.  Make no mistake, this company is in virtually no danger of going bankrupt, however I want to see the earnings declines stabilize before putting money behind First Solar.  Oh, there is that rumor that keeps popping up about the company being a takeover target…

KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends 3M. The Motley Fool owns shares of General Electric Company. 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!

blog comments powered by Disqus