First Solar: A Solid Long Term Investment
Helen 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)'s stock price exceeded $300 in early 2008. Today it trades below $30 a share, with a current market cap of $2.38 billion.The price of the Guggenheim Solar ETF (TAN), which tracks the MAC Global Solar Energy Index, has had a similar development, also losing about 90% of its value during the last four years.
The solar industry is clearly troubled and more clouds are on the horizon as solar energy subsidies are being slashed. In most countries, the subsidies take the form of feed-in tariff (FiT) reductions, intended to provide certainty to investors in solar technology and therefore support new supply development.
Germany, the largest market for solar panels, cut subsidies in 2011, and might eliminate them completely this year. Germany accounted for about 23% of First Solar’s 2011 net sales, so the company will be strongly affected by future policy changes. As of now, First Solar is halting four production lines at its German plant for as long as six months.
In France, which represented approximately 15% of First Solar’s 2011 sales, the government adopted a decree introducing a new market support framework which posits a tender process for large rooftop and free-field systems which is expected to have a negative effect on the installment of photovoltaic cells. As a result, First Solar has delayed the construction of its two-line plant in France.
Moreover, First Solar is postponing its plans for building a four-line plant in Vietnam and another four-line plant in Mesa, Arizona. For 2012, the company expects its factory utilization rates to be 60% to 70%, down from an earlier forecast of 80%. It projects the production of 1.5 gigawatts to 1.8 gigawatts of panels. In February, First Solar cut its yearly sales forecast down to between $3.5 billion and $3.8 billion from earlier expectations of between $3.7 billion and $4 billion.
First Solar’s competitors are also scaling back production and lowering their 2012 sales estimates as demand for photovoltaic technology continues to weaken and governments are withdrawing their financial support. The previous overproduction of solar cells, which had been spurred by subsidies, has led to overcapacity and high inventories, not just for U.S. and European, but also for Chinese manufacturers.
During 2011, industry average module pricing declined significantly as companies reduced prices to sell down inventories, especially in Europe. Prices for solar panels fell by over half, drastically reducing the profit margins of photovoltaic manufacturers.
First Solar’s trailing twelve months profit margin is now -1.43%, compared to 2.95% for LDK Solar (LDK), 0.4% for Suntech Power Holdings (STP), -1.85% for Trina Solar (TSL), -21.86% for Yingli Green Energy (YGE), -26.11% for SunPower (SPWR), and -56.56% for MEMC Electronics (WFR). For some companies, including Energy Conversion Devices (ENERQ.PK) and Solyndra, the pressure has been too great, and they have declared bankruptcy.
However, there a few silver linings in this dark season. The business environment for solar energy will not continue to deteriorate indefinitely. Although in the short term, European governments will keep cutting subsidies in order to survive the financial crisis, the cost reductions will be limited by their commitment to the EU directive’s goal of a 20% share of energy from renewable sources in the EU by 2020. In the U.S., the stop-start environment for renewable energy project financing should improve along with economy. In the long term, the adoption of solar technology, at least for peak power production which is already at or near grid parity, is still viable.
Some of the excess photovoltaic production could be absorbed by China, which may double its solar installations in 2012, adding 4 to 5 gigawatts of panels compared with 2.2 gigawatts in 2011. As First Solar is a global player, it will be able to capture some of the new demand, wherever it might come from.
What should also help First Solar to survive the current downturn is its engineering, procurement and construction (EPC) expertise for solar projects, which is vertically integrated with its panel businesses. In an effort to reduce its reliance on subsidies, the company has invested heavily in technology and production at utility scale. Its solar farms can generate enough electricity to power whole communities.
An example is the 3,500-acre, 550-megawatt Topaz Solar Farm in California. In December 2011, First Solar sold Topaz to MidAmerican Energy Holdings, which is owned by Warren Buffett’s Berkshire Hathaway (BRK-B). Topaz was one of the first solar energy plants that did not qualify for financing under the U.S. Department of Energy’s loan guarantee scheme, resulting in a shortfall of $1.9 million. The facility is still under construction, and First Solar will continue to build and operate it.
The policy changes at the state level might actually represent an opportunity insofar as they set off a shake-out and consolidation of the global photovoltaic industry. As of the end of 2011, the sector comprised over 150 manufacturers of solar modules and cells. That number is likely to be reduced to fewer but bigger global players through mergers within and between the main manufacturing territories of the U.S., Germany and China.
Solar companies might also be targets for technology majors. General Electric (NYSE: GE) for one is interested in buying photovoltaic production capacity and might be a suitor for First Solar. Back in November, the company annouced it will build a Photovoltaic manufacturing plant in Aurora, Colorado, with plans to start production this year. Another potential buyer would be Siemens. A further possibility that would boost First Solar’s share price is a partnership with an industrial or energy conglomerate along the lines of Total’s (NYSE: TOT) strategic relationship with SunPower, of which it now owns 60%.
Whatever form a deal would take, First Solar is a cheap buy at a price to book ratio of about 0.65. I would recommend going long.
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