Warren Buffett, the Oracle of Omaha, reiterated his mantra last week in a New York Times op-ed: “Be fearful when others are greedy and greedy when others are fearful.” There is no better time for green value investors to heed that advice than right now.
But, with the market meltdown and recent solar sector downgrades by Goldman Sachs (NYSE: GS) and others, green investors might be turning green about now. Goldman downgraded both First Solar (NSDQ: FSLR) and SunPower (NSDQ: SPWRA) and Canaccord Adams continued the carnage with JA Solar (NSDQ: JASO).
So take a deep breath and repeat after me, “In Warren we trust.” Solar stocks are on sale and I like the First Solar story. And the story goes like this: thin-film solar module manufacturer wants to be first in the industry to be cost competitive with retail electricity.
Here’s more to like:
Revenue and Earnings Growth
- Triple digit revenue increases in 2007 and 2006 (273% and 181%)
- Triple digit revenue increases in the second and first quarters of 2008 (246% and 194% respectively)
- Earnings increase of 47% in the second quarter and 714% in the first quarter of 2008
Those revenues will continue to be strong, at least through 2012. According to its 2007 10-K, First Solar has $5.9 billion of long term supply contracts to supply European customers with 3.2GW of solar modules over the 2008 – 2012 period.
- Year-over-year gross margin increases from 37% to 54% in the second quarter and sequential increase of 53% to 54%.
According to First Solar’s second quarter earnings call, gross margin drivers were favorable exchange rates, increased conversion efficiency, higher module run rates and lower costs.
- Forward P/E of 20 (Yahoo! Finance consensus Dec. 09 estimate) as of 10/22 close
With a forward P/E fluctuating between the high-teens and low-twenties, First Solar is trading at a much more reasonable valuation than previously, down 57% off its 52 week high of $317.
While First Solar trades at a higher forward multiple than competitors like Suntech Power (NYSE: STP) at 8 or Sunpower at 12, its valuation may be justified by its strong growth as pointed out by cleantech evangelist Jack Uldrich in his Green Investing guide. Savvy value investors will recognize First Solar at this bargain basement price as one of Benjamin Graham’s proverbial half-smoked cigars.
- Current ratio of 3; peers Evergreen Solar (NSDQ: ESLR) and Canadian Solar (NSDQ: CSIQ) had current ratios of 1.5 and 2.1 respectively
With $633 million in its cash war chest as of the end of the second quarter, First Solar is well-positioned to ride out a possible short-term credit crunch.
And don’t forget grid parity
A big part of the First Solar story is achieving grid parity by lowering its cost per watt until it is competitive with traditional electricity rates. As of the second quarter, First Solar’s cost per watt was $1.18. By comparison, cost per watt was $1.23 in 2007 and $1.42 in 2006.
According to its second quarter 10-Q its objective is to “become by 2010, the first solar module manufacturer to offer a solar electricity solution that generates electricity on a non-subsidized basis at a price equal to the price of retail electricity in key markets in North America, Europe and Asia.” That’s grid parity to you and me, the solar industry’s Holy Grail.
The tradeoff with thin-film solar modules is that while they are less expensive than their silicon cell counterparts, they are also less efficient at converting sunlight into energy. Continued cost per watt reductions with improving conversion efficiency will be important metrics to watch moving forward especially as First Solar approaches the $1.00 per watt milestone.
And while I think First Solar is an industry leader trading at an attractive valuation, you should do your own research. And remember: be green and be greedy.
Disclosure: Contributor Chris Cather owns shares in the Claymore/MAC Global Solar Energy Index ETF (TAN), which has holdings in FSLR, STP, SPWRA, JASO, ESLR, and CSIQ.