First Solar Inc. (FSLR) stock has been on fire. Since June 4th the stock price has increased by 131%. The stock has rallied because investors are encouraged due to the change in the business focus, from selling rooftop and off-grid market solar modules, to providing utility-scale photovoltaic (PV) systems to utility companies. The shift in business models will allow the company to bring grid integration systems to the utility customer.
The change in First Solar's business direction will make it a leader in the PV power plant market. By selling PV systems the company will be able to market its products to investor-owned utilities commercial and industrial companies, and other system owners who purchase the Company's completed solar power plants. It has already allowed the company to expand its advance plant control system technology to its international geographic portfolio. The company recently signed contracts for photovoltaic power plants in India, Australia, Dubai, Thailand, Indonesia and China. In addition, the company has signed contracts with notable U. S. utility companies including Exelon (EXC) Enbridge (ENB) and Berkshire Hathaway (BRK.A). First Solar also recently signed new contracts, with Pacific Gas and Electric Company for two PV plants in California, and with NRG Energy and Mid America Solar for the Agua Caliente power plant in Yuma County, Arizona. The Agua Caliente power plant will be the world's largest operating (PV) power plant.
This change in business direction will give First Solar two competitive business advantages. First by selling PV power plants First Solar can limit overhead by cutting expensive solar panel production. In addition, the company can control cost by charging utility companies up front for labor and panel cost. First Solar will also become less dependent on smaller customers that need government subsidies to buy their products.
While the rise in First Solar stock price was largely fueled by its change in business strategy and increased international business, the recent 10% boost in the stock price was due to the November 8th International Trade Commission's (ITC) decision to stop the illegal dumping of Chinese solar cells in the U. S. market by imposing stiff tariffs. By imposing tariffs, the ITC has enabled First Solar to more effectively compete against Chinese solar companies such as Yingli Energy (YGE), Suntech Power Holdings (STP), Trina Solar (TSL) and LDK Solar (LDK), whose stock prices all dropped significantly in response to the ITC's decision.
Positive developments that could affect First Solar moving forward
First Solar has been a favorite for institutional buyers. First Solar's Net institutional purchases in the current quarter are at 11.5M shares, which represents about 19.62% of the company's float of 58.62M shares.
On November 8th, the ITC voted 6-0 that U.S. solar-panel manufacturers have been harmed by illegal dumping from their Chinese rivals, opening the way for the Commerce Department to impose tariffs. The department has said these tariffs will mainly be 24%-36%, although some face duties of up to 250%. North American firms in focus are: SPWR, FSLR, CSIQ, and WFR. China: JASO, CSUN, STP, SOLR, SOL, YGE, LDK, CSUN.
President Obama's re-election: President Obama has been a big backer of renewable energy. In his first term, his administration, through the 2009 economic stimulus act, spent over $90 billion on the renewable energy sector, and it seems likely that the administration will continue to support renewable energy companies in his second term.
Negative developments that could affect First Solar moving forward
On November 2nd, it was announced that Cantor is downgrading First Solar to Hold on valuation and concerns about the profitability of new projects. Management noted on the earnings call that First Solar continues to see "an increasing number of production cuts, capacity reductions and bankruptcies," and that several construction sites have been impacted by Hurricane Sandy.
First Solar will see reduced third quarter earnings because of a delay in its Agua Caliente project. First Solar won't ship additional modules until January to the $1.8 billion Agua Caliente project and won't install panels currently sitting on the ground at the site, said Fred Pech, the power plant's construction manager. The solar farm is scheduled for completion at the end of 2013 and is 85 percent built.
First Solar's stock price is down by 45% over the last 52 weeks, but things have changed, due to three new developments, the company's change in business strategy, President Obama's re-election and the ITC's trade decision. The change in business strategy will allow the company to do business in a business area where it will be a leader and face limited competition. The second development is a newly elected U.S. administration that favors renewable energy solutions, and the third development was the ITC's ruling which will enable First Solar to compete on a level playing field with Chinese solar cell manufacturers. The ITC's decision could be huge for First Solar because it will allow the company to increase business in a U. S market that is likely to see rapid growth as a result of the President's re-election.
Since these new developments occurred, First Solar's stock price is up by 11%, and I expect that it will continue to move higher. Despite the rally, First Solar's stock is still cheap (price to book ratio 0.66/forward price to earnings ratio 6.46). While I expect that First Solar's stock will move higher, I must caution that the stock is volatile (its stock hit a 52 week high of $51.89 on December 7, 2011 and a 52 week low of $11.43 on June 4, 2012), and may be more suited for short term traders than for long term investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.