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First Solar: Unique Play in Solar Modules

The company has continued to make strides in developing the cost-to-efficiency ratio of its product.

First Solar (FSLR) is unique among manufacturers of solar modules in that it has a strong balance sheet and the leading position in a very strong solar niche, thin film, explains Stephen Leeb, growth stock expert and editor of Real World Investing.

While most solar paneling is photovoltaic (PV), FSLR was one of the creators of an alternative technology, thin film, that while less efficient than the solar panels you typically see on rooftops is much less expensive and is suitable for solar farms.

The company has continued to make strides in developing the cost-to-efficiency ratio of its product. Most customers today are solar farms and utilities, which typically place very large orders, one of the reasons for the company’s highly erratic earnings over the years.

But highly erratic still beats the large number of bankruptcies among PV manufacturers as that industry has become commoditized, meaning intense price competition and very low margins. FSLR, by contrast, has maintained positive earnings and margins throughout its history as a public company.

The company has not completely escaped the PV pricing wars. While PV has not been very profitable, it has taken market share from thin film, where FSLR is the clear leader.

The recent ruling that PV modules are underpriced and should be subject to a high tariff will likely benefit FSLR handsomely. Equally or more important is that the company will introduce a technologically more advanced product sometime in the next 12 months.

The transition from the current product line, dubbed S-4, to the new S-6 will be challenging as the company will be using the same manufacturing facilities for the new product. This could hinder profit growth in 2018 before leading to soaring profits in 2019 and beyond.

That, of course, assumes the success of S-6, but such success appears highly probable based on initial reactions of potential customers. With its strong balance sheet, the company also is in the catbird’s seat when it comes to potential acquisitions.

The big picture is a company that is a leader in an important segment of renewable energies and that could easily be earning $5.00 a share by 2019 and poised for very strong growth thereafter. There are risks but with an upside that is more than double the current price; we think they’re well worth taking.

Stephen Leeb is founder and research chairman of the Leeb Group.

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