The Best Investment in Solar Technology

By Piyush Arora - September 25, 2012 | Tickers: FSLR, SPWR, TSL | 0 Comments

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A stock would turn out to be a good pick, if the company performs well despite the macroeconomic headwinds faced by the industry. Also if the company operates in an industry where there are tremendous growth opportunities over the longer term, the stock would be a great pick.  The world is steadily moving towards sources of clean energy, giving companies involved in energy production from solar energy, a good leeway to grow. The company we’re bullish on is First Solar (NASDAQ: FSLR), and here are a few reasons why you should be too.

First Solar is solar panel manufacturer, based in the US. The company with a market cap in excess of $1.8 billion produced more than 2 gigawatts of solar modules last year. First Solar is one of the leading players in solar module manufacturers which recently became the first company to manufacture solar modules at the cost of $1 per watt. The figure now stands at 73 cents per watt, which makes energy generation from solar energy, economically viable.

World over, governments are concerned about global warming caused by burning of fossil fuels. On numerous instances we have seen countries being advised to lower their emission levels, and generating power from fossil fuels like coal isn’t going to help in any way. Additionally, these resources would deplete over time, which would push up the prices of fossil fuels along with the price of the electricity generated.

Wind and geothermal energy could provide affordable choice, but implementing them on a large scale is economically unviable. Nuclear energy does provide clean energy but many countries like Germany believe that the risks involved with nuclear energy are very high. Solar energy used to be unaffordable but now it’s not and additionally, solar can be implemented on a large scale unlike other renewable sources of energy. These factors ensure that the solar module manufacturers have a bright future ahead.

First Solar aims to capture 20% of the market share in India and the company is looking to develop nearly 160 megawatts of new electricity generation capacity in Australia. To add to it, the First Solar would be also adding 139 megawatts of electricity generation capacity in the state of California.

When an original equipment manufacturer (OEM) makes a sale, it is more likely that the customer will hire the same company for the maintenance and repairs of the equipment sold. The same goes with the solar panels, and First Solar makes a good share of its revenues through maintenance and repairs. To ensure higher revenues amongst the period of cut throat competition and oversupply, First Solar has adopted the strategy of marketing complete solar projects instead of solar panels. The strategy seems to be working for the company as recently the company reported a mammoth 79.5% jump in topline. To complement the topline, the EPS stood at $1.92 beating the estimated $0.92.

First Solar shares its market with Trina Solar (NYSE: TSL) and Sun Power Corporation (NASDAQ: SPWR). By comparing the metrics of the three companies, we come up with First Solar as our fundamental pick. First Solar has the highest gross profit margin along with the least debt compared to its equity. The shares of First Solar trade at 5.18x P/E indicating that the stock is undervalued.

The industry is booming with solar energy players and this has led to an oversupply. The margins of most companies have been stressed, with major players struggling with their negative bottomline. We believe that with the cost per watts being pushed to newer lows by First Solar, the company would be able to just fine. Stocks of First Solar may have declined YTD but have seen a 33% upside over the last three months. It is because of all the mentioned compelling reasons that we have a Foolish long term buy rating for First Solar.

Interested in Additional Analysis?

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