​First Solar Still A Buy Despite Crashing Solar Prices

Sneha Shah  |

Solar panel prices have crashed by around 30% in 2016, which has made every major producer rethink their strategy with respect to expansion and growth. Many solar stocks have seen their prices fall by 40-80% in 2016 as a massively oversupplied market has resulted in prices going below costs for most companies. First Solar, Inc. (NASDAQ:FSLR) with its rapid technology improvements, has seen a sharp improvement in fundamentals over the last years, but the sharp crash in solar panel prices has made it defer most of its solar system projects.

First Solar, which is USA’s largest solar company, has recently been facing a lot of heat from the investor community for a number of reasons. The company has been forced to fast forward the production of its S6 modules and skip the entire S5 series. It is also laying off a large number of its workforce and has also given a weak guidance for 2017. First Solar can also face slow growth in its main USA market under the new Trump administration.

Yet despite these headwinds, First Solar remains a buy in my books owing to the following rationale:

i) Most Valued Solar Company - The company has excelled on all fronts, such as solar panel efficiency, revenue growth, bookings, etc. First Solar uses a unique thin film solar panel technology, which has made impressive gains in efficiency over the last few years. Its solar panels have reached an efficiency level of 16.5%, making it equal to the multicrystalline solar panel efficiency and removing its biggest disadvantage with respect to mainstream silicon solar panel companies such as Trina Solar (NYSE:TSL) and Jinko Solar Holding Co., Ltd (NYSE:JKS).

In 2015, the company reported record revenues of $3.6 billion with EPS of more than $5.00. First Solar has installed solar projects with 10 GW of solar capacity around the world. The company's solar panel is considered highly bankable and is one of the top utility installers’ choices in the USA. The company has lowered the Levelized Cost of Energy (LCOE) of solar projects through consistent improvement in efficiency and cost.

ii) Solid Balance Sheet – We have seen many solar companies collapse in the past because of a weak balance sheet. SunEdison which was poised to become an industry leader in renewable energy went bankrupt because it overstretched its balance sheet to cater to its ambitious needs. In comparison to the rest of the debt heavy industry, First Solar has a pristine balance sheet. The company not only has little debt but also holds a large amount of cash on its balance sheet to help it steer through difficult times. First Solar expects to end a net cash balance of $1.4-$1.6 billion at the end of FY 2017.

iii) Strong Management and R&D Team – Even in the wake of the company’s revenues falling by almost 46% during its most recent reported quarter and a weak 2017 guidance, First Solar management made smart decisions keeping the long term future of the company in mind. The company’s management took a few important steps which in my view could help the company ride the turmoil facing the industry today. The Series 6 panels which the company has decided to launch, are extremely competitive and would also entail “drastic reduction in overall manufacturing costs” for First Solar. With a 40% expected decline in costs, Series 6 could not only leave behind other solar companies but would also give a coal and gas a run for their money

“We feel strongly that our Series 6 modules provide a path for long-term growth and attractive returns even if today’s challenging market conditions continue.” – Mark Widmar CEO First Solar

Source: Seeking Alpha Transcript

One of the critical reasons why First Solar has survived the ups and downs of the solar industry is due to its impressive technological capabilities. The company’s R&D team needs to be applauded for making Cd-Te technology in the race with the mainstream silicon technology. Scores of thin film solar companies have closed down shutters. Even industry stalwarts such as General Electric and TSMC have failed but First Solar has not only survived but thrived.

iv) Survived in the Past - First Solar continues to run well with a great R&D team and has managed to survive in this industry for more than 15 years, even as other leaders such as Suntech, Q-Cells, LDK and Solyndra have become bankrupt. It has done so by flexibly moving into high margin segments such as system installation. Unlike the Chinese, it did not have the luxury of unlimited amounts of state backed debt financing to keep on running its factories at a loss.

Stock Performance

First Solar stock has fallen more than 55% year to date and is currently trading at levels closer to its 52 week low price. The company now has a market capitalization value of $2.7 billion and trades at a P/E of nearly 6x. As per a recent Oxford study, solar energy could provide upto 10% of the total energy by 2027 which would mean an exponential growth in installations. Given First Solar's leadership position, it would mean that First Solar could easily be a multi bagger.

Summary

The current demand slowdown in China and the global low price scenario has affected the whole industry at large. It remains to be seen which companies are fit enough to survive this vicious downturn and which will succumb. Though First Solar slashed its 2017 revenue guidance by close to $1 billion, it raised its gross margin expectation to 25.5%-26% from 18.5%-19%. Utility solar has now become competitive with gas and coal even without any subsidies. Major countries like India and China are heavily supporting renewable energy and demand for clean energy is also growing. This downturn will also lead to industry consolidation and I am confident that First Solar will survive due to its strong balance sheet, improving technology and cost reductions. Higher oil prices could also prove to be an unexpected positive catalyst for the company. I would strongly advise investors to take a position in First Solar given the extremely favorable risk reward ratio.

Sneha Shah is the Editor of Greenworldinvestor Blog

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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