As anyone would know from reading my recent articles, I believe First Solar (NASDAQ:FSLR) to be undervalued, thus presenting a very good mid-to-long term investment opportunity. Although only a short time has passed since writing my last article, there have been upgrades (Raymond James), downgrades (Robert W. Baird), and initiated coverage (Northland Capital), relating to FSLR, while much more than usual has been written on the solar industry and specific companies operating within it.
What has been of real interest has been the number of analysts and authors drawing direct comparisons between solar related companies, only to conclude that SunPower (NASDAQ:SPWR) is the best investment at these levels and not First Solar, which I have found surprising to say the least. As just one example, Northland Capital initiated coverage on both First Solar and SunPower, rating FSLR as underperform with a $20 price target and SPWR as outperform with a $14 price target. Interestingly, if the two companies were to trade at these prices, the market cap for FSLR would be $1.74B, while SPWR would be $1.64B. Is this a fair valuation for each company? Are investors, authors and analysts right to conclude that SPWR represents a good investment or that FSLR does not?
I think it's time to do a head to head on these two companies to determine which represents the better investment opportunity today, while also determining if one, both or neither are a good place to invest in general.
I am going to first compare financial strength using information contained in both company's most recent 10-K's for fiscal year 2012. These documents can be found on the SEC website, or by using the following links:
The following are all GAAP measures, unless otherwise stated:
|and Accounts Receivable||000,000's|
|FSLR||$ 1,958||$ 1,516||$ 1,241|
As the above table illustrates, FSLR's total cash and receivables position has grown close to 58% over the past three years, while SPWR's has declined (26%). In 2010, the two companies had almost an identical cash and receivables balance, but by the end of 2012, FSLR had over $1B more than SPWR, or a 116% greater balance. At the end of 2012, FSLR's cash and receivables balance exceeded its current liabilities balance by 78%, while SPWR's was (6%) less than its current liabilities balance. As such, SPWR does not have enough short-term liquid assets to cover its current liabilities. The trend is very positive for FSLR, while being very negative for SPWR, which just 2 years ago had 56% more in liquid short-term assets than current liabilities.
Investors may want to make note of the fact that over the past three years, First Solar has created total operational cash flow of $1.43B versus SunPower's $101M. Knowing this, one may ask the question, how has SunPower been able to invest in capital, pay debt as it came due, etc, given the small amount of operational cash flow they've been able to generate? Well, over the past three years SunPower has received $853M in new debt financing and has raised $232M in proceeds from the dilutive offering of common stock and exercise of stock options and warrants. Over that same time frame, First Solar has only received $370M in new debt financing and $18M from the exercise of options while not selling any new shares.
This leads me to the next table of financial indicators:
|Long-term liabilities as a|
|% of non-current assets|
|Debt to equity ratio|
As can be seen above, each of the two companies have had negative trends over the past three years. First Solar, over that time frame, has incurred $923M in restructuring charges and goodwill impairment. These expenses have had a large impact on such debt and equity type ratios, however, they are one-time, non-cash items that will not repeat themselves in the future. Conversely, SunPower has had only $531M in similar charges, while benefiting from a one-time gain of $51M associated with the sale of a share lending arrangement. The greatest impact to SPWR, as mentioned earlier, has been its inability to produce adequate operational cash flows, thus requiring additional debt to fund growth and operations. SPWR's ratios would have been even worse had they not raised the $232M in funds from share, option and warrant sales, (compared to FSLR's $18M). As it stands, from the two tables above you can see that SunPower not only has more current liabilities than liquid assets, but 98.8% of its long-lived assets are financed with long-term debt. Conversely, First Solar has 78% more liquid assets than current liabilities and only 47.7% of its long-lived assets are financed with long-term debt. Given this, it is not surprising that FSLR has a very healthy debt to equity ratio of 0.76, while SPWR has 2.36 times more debt than it has equity...ouch!
Perhaps SPWR will fare better when comparing financial results rather than current financial strength.
|Gross Margin %|
As can be seen, First Solar has increased sales by 31.4% over the past two years, while SunPower has only increased sales by 8.9%. Both companies have decreased their margins to compete, however, First Solar maintained a healthy 25.3% margin in 2012, which, by the way, is higher than SunPower has had in any year over the past 6 years, (including their boom years before silicon prices dropped through the floor due to over-supply). That said, FSLR's margins have declined 45% since 2010, while SPWR's have declined 56%.
Earnings per share for the three years combined are $6.14 for FSLR and a loss of ($7.54) for SPWR. But what about the one-time impacts of restructuring costs, goodwill impairments and gains on share lending arrangements? Well, if you eliminate those impacts you'll find that FSLR had EPS of $4.29, $4.81 and $7.68 for 2012, 2011 and 2010, for total 3-year EPS of $16.78. SunPower's EPS would have been ($2.07), ($2.48) and $1.75 for 2012, 2011 and 2010, for total 3-year negative EPS of ($2.80). So, on a GAAP basis, FSLR has earned $13.68 more per share than SPWR over the past three years, while on a non-GAAP basis, (adjusting for apples to apples extraordinary items), FSLR has earned $19.58 more per share over the past three years. As such, while FSLR was operationally VERY profitable after eliminating one-time charges, SPWR still lost money when eliminating the same charges, meaning losses are far more concerning given they have nothing to do with non-recurring expenses and everything to do with not being able to operate profitably.
But who cares, right? All of this is current financial strength and past financial performance, as such, it may not be reflective of future performance or value. Perhaps the two company's actual guidance for the upcoming quarter and year will lean towards SunPower?
Well, with its 4th quarter and full year earnings release, SunPower indicated on page 17 of the supporting slides that it would have GAAP sales of $450-$525M in Q1 of 2013, or a mean expectation of $487.5M. This should be compared to $494M in actual GAAP sales for the first quarter of 2012, meaning it has forecast to be slightly down to flat year over year. Conversely, First Solar has given 1st quarter guidance on page 16 of their 4th quarter earnings release slides of $650-$750M or a mean expectation of $700M. Again, this should be compared to 1st quarter 2012, when FSLR had sales of $497M, meaning it has forecast to increase sales by 41% year over year. Think that's bad for SPWR in the head to head comparison, it gets worse.
SunPower indicates on the same slide that it will have margins of 3-7%, or a mean margin of 5%, representing more than a 50% decrease in margin percentage from their full year 2012. First Solar has indicated they will maintain current margins, coming in at between 25-27%. Given the sales and margin guidance, it comes as no surprise that SPWR has said they expect to lose between ($0.60)-($0.85) per share for the upcoming quarter. Based on the mean estimated loss of ($0.725), this equates to a loss of ($84.9M) for the quarter. Again, this loss should be compared to Q1 of 2012, when SunPower lost ($0.64) per share, adjusted for restructuring charges. This means the loss will be widening year over year. First Solar, on the other hand, is expecting earnings per share between $0.70-$0.90 for the quarter, equating to approximate earnings of $69.5M, which should be compared to their 1st quarter of 2012, when they actually lost ($0.08) per share, adjusted for restructuring charges. With their expected 1st quarter earnings, First Solar will have increased earnings year over year for 3 of their past 4 quarters, and have trailing 4 quarter earnings of $5.17, (adjusted for restructuring charges). Meanwhile, SunPower will have a trailing 4 quarter adjusted loss of ($2.16) per share.
On the 4th quarter earnings conference call, First Solar's CFO, Mark Widmar, indicated that the company expected the second quarter to be even stronger than the first, while the second half of the year would be weaker than the first half. They stopped short of giving any further detailed guidance, but did say that they are in the midst of "evaluating, negotiating and developing a number of transactions or market opportunities which, if transacted, could materially impact our 2013 guidance." As such, there appears to be upside for the second half, and even some possible announcements forthcoming. They will be holding an Analyst Day on April 9th to provide more financial guidance and clarification on corporate strategy. SunPower, like First Solar, only provided detailed guidance for Q1, however, they have indicated a weak 2nd quarter as well with a stronger second half to the year. That said, given the expected results for the first half, don't you have to consider anything they do in the second half an improvement? Regardless, it is highly unlikely that SPWR will have positive EPS in any quarter this year. Conversely, FSLR should see positive EPS in each and every quarter.
Thus far in the head to head comparison we can conclude the following:
- First Solar is in a far better current financial position having much higher ratios of liquidable assets versus liabilities, lower debt to equity and a less leveraged balance sheet than SPWR.
- First Solar has generated a phenomenal amount of cash over the past three years, in fact, $1.43B in total operational cash flows means FSLR has converted 16.4% of all sales into cash over that same time frame. Unfortunately for SPWR, it has not been able to do the same, only generating $101M in operational cash flow, or 1.4% of sales, thus having to turn to new debt and share dilution to pay for growth and operations.
- First Solar has increased sales at close to 4 times the rate of SPWR over the past three years and, even after a 46% decline in margin rate, continues to have margins higher than SPWR has experienced in any year over the past 6 years, (even those years when silicon supply and pricing were considered to be at healthy levels). SPWR has experienced minimal sales growth over the past 3 years and is forecasting to remain flat, if not decline slightly, in the first half of 2013. In order to remain at even this level of sales, SPWR is selling its solar panels at margins between 3-7%, which borders on giving them away. FSLR, conversely, is set to grow sales in the first half by more than 40% year over year while maintaining margins of between 25-27%.
- First Solar has had both positive GAAP EPS and normalized, non-GAAP EPS for the three years total, while SPWR has had negative EPS on both accounts. In fact, FSLR has earned close to $14 more per share under GAAP and $20 more per share non-GAAP than SunPower. In the first quarter of 2013, FSLR will again earn between $0.70-$0.90 per share, while SPWR will lose between ($0.60)-($0.85) per share on a GAAP basis.
I think it is fair to say at this point that First Solar's financial position, past results and near-term expected results are VASTLY superior to SunPower's. Again though, what does this matter? Perhaps the comparative financial position and performance is already reflected in the two company's share prices, meaning one or both are already fairly valued.
Well let's take a look. Based on the closing prices per share on March 8th, I can present the following comparisons:
|Market Cap||$ 2,290||$ 1,420|
|Book Value end 2012||3,606||993|
|% of Book Value||63.5%||143.0%|
|Non-GAAP EPS 2012||4.29||(2.07)|
First Solar is currently trading at only 63.5% of their book value from the end of the 2012 fiscal year. That said, guidance is to add another $69.5M to that total by the end of Q1 2013. As such, if the current share price remains the same, it will be trading at 62.3% of expected Q1 book value. SPWR is currently trading at 143% of its book value from the end of the 2012 fiscal year. As stated above, SPWR expects to erode current book value by another ($84.9M) in Q1, meaning the current market cap represents 156.4% of expected Q1 book value. Putting this in perspective, if we use current market cap as a proxy for what investors deem to be the future book value of each company, then investors are expecting FSLR to lose ($1.32B) over the next several years while, over the same time frame, they expect SPWR to have positive earnings of $427M. This, quite obviously, will not take place until after fiscal year 2013 given that FSLR is expected to add to their current book value for the year while SPWR is expected to erode their current book value.
With regard to a multiple of EPS, First Solar is only trading at 6.13 times 2012 earnings and 5.09 times trailing 4 quarter earnings based on expected Q1 results for 2013. Conversely, it is not possible to calculate, (or even rationalize), the multiple on which SPWR trades. SPWR has had adjusted non-GAAP losses each of the last two years, so the current price is certainly not reflective of any multiple of past performance. Likewise, they are projecting a loss for Q1 and Q2, and will almost certainly have negative EPS for the full year given the magnitude of losses expected for the first half. As such, the current share price is not reflective of any kind of multiple associated with the next 4 quarters. Again, it's very difficult to rationalize.
Based on this analysis, it would be difficult to argue the current trading prices of these two respective company's shares reflects their financial position, historical financial results or near-term financial guidance. As such, it would appear FSLR is dramatically undervalued while SPWR is vastly overvalued.
Perhaps, however, the valuation each company has is not meant to reflect anything other than the long-term prospects associated with each company's ability to grow sales. Based on their current valuations, if this were the case, investors see SunPower as being in a better position to grow sales than First Solar. Of course, we can't talk about growing sales without mentioning something even more important, which is their ability to turn sales into profits, something SPWR has not been able to do for quite some time now. But let's look at future sales.
First Solar unequivocally does a much better job than SunPower of disclosing future sales and book to bill ratios. It's arguable whether this hinders or hurts them, as investors and analysts tend to react harshly when the forward book decreases, as could be seen recently when FSLR disclosed that their forward book had declined from $9.4B to $8.0B throughout 2012. On SunPower's earnings slides, no such reconciliation is made available. They do, however, note on page 6 of their presentation that they have predictable visibility to greater than $3.5B of sales. In listening to the conference call, this refers to their Power Plant sales over the next four years. So, do we then compare this to FSLR's $8.0B in similar predictable future sales, much of which is for the next 3 years? If so, that's not so good for SPWR given First Solar's current $5.5B lead in this regard. Couple that with First Solar's recent guidance that they intend to have at least a 1:1 book to bill ratio for 2013, and it would appear FSLR feels much more comfortable in their ability to get future sales than does SPWR. Again, however, SPWR does not provide this information to investors.
Given that SunPower's known future sales are vastly less than First Solar's, perhaps investors are putting their faith in SunPower's technology to grow sales at a faster pace than First Solar. Much has been made about the conversion efficiency of SunPower's technology, which is a silicon based photovoltaic panel. They have recently launched their Gen3 Maxeon Solar Panel which has been laboratory tested to obtain a 24% efficiency. Now, that said, this is not what a customer should expect under real world conditions, nor what SunPower has experienced over the past year as a weighted average conversion efficiency of actual installed panels. Similarly, First Solar recently announced that they have set the new world record for CdTe conversion efficiency at 18.7%, again, not indicative of current real-world experience or recent actual results. As such, First Solar discloses its year over year weighted average conversion efficiency in its financial slides, that being 12.9% and 12.6% for 2012 and 2011 respectively. Unfortunately, you'll not see these numbers disclosed by SunPower anywhere in the earnings release information or 10-K, making it difficult to directly compare the two companies in this regard.
First Solar also provides investors with its cost per watt produced, currently sitting at $0.68 in Q4, (all-in), and at $0.64 in their best production plant. Once again, SunPower does not directly disclose this information, however, SunPower's CEO, Tom Warner, did mention in the 4th quarter earnings conference call that their largest panel had now achieved a cost per watt of less than $1.00. As such, it would appear First Solar has one heck of an edge in this regard.
Why are these numbers even important? Well, for SunPower to grow its top line like First Solar has been able to do, they have to prove to would-be customers (especially in the solar project space) that they represent the better investment. In calculating their return on investment, a customer will look at a number of factors, namely energy conversion versus up-front cost of capital, as well as on-going operational and maintenance costs over time that are not covered by warranty. In SunPower's case, they are not nearly as competitive as First Solar when it comes to the cost per watt produced, even though they are arguably more efficient. As such, we can conclude that the up-front costs are much higher for customers deciding to go with SunPower. In order to combat this issue, SunPower must sell its panels at much lower margins than First Solar to compete, which has been evidenced in their financial results over the past several years, as well as in their gross profit guidance for the upcoming quarter. As silicon prices recover and the input costs go up for SunPower's panels, it will make it increasingly more difficult for them to compete with First Solar on up-front price. As time goes on, it will be interesting to see who will win out on efficiency and cost per watt, but investors may want to take note that First Solar has spent $273M on research and development over the past two years, which is 126% more than SunPower's $121M over that same timeframe.
As one may have figured out by now, one of the major beefs I have with SPWR is their lack of disclosure and constant reliance on non-GAAP measures. All companies tend to use non-GAAP measures to some degree, however in the case of SPWR, they are EXTREMELY liberal in their calculations. I would ask that investors look to the last table in FSLR's earnings release where you will see a reconciliation of GAAP to non-GAAP EPS for First Solar's 2012 fiscal year. First Solar adds back tax-impacted restructuring charges and costs in excess of normal warranty expenses. The costs in excess are fully described, in detail, below the table so investors can see for themselves the reasons the company see's these costs as extraordinary. Over the past several years, First Solar has used this very simplistic and conservative GAAP to non-GAAP reconciliation. Conversely, look to page 21 of SunPower's most recent earnings slides and you'll see SPWR's reconciliation of GAAP to non-GAAP EPS. There are 18 separate reconciling items used in total over the past two years, most of which are blatantly operational and none of which have a note to describe why the expense should be considered out of the ordinary with regard to calculating the company's earnings.
According to SPWR, they've had non-GAAP earnings each of the past two years, and if you're not an overly savvy investor, you may just buy into their profitability story. In 2011, they reported a GAAP loss per share of ($6.28), but non-GAAP earnings of $0.18 per share. How did they do this given only $3.58 per share related to restructuring costs and goodwill impairments? Somehow they were able to find another $265M in operational expenditures to add back to GAAP losses to ensure they appeared profitable. In 2012 they had 16 items on their GAAP to non-GAAP EPS reconciliation, of these, only 9 were comparable year over year, meaning they change what is or is not a reconciling item from year to year. The fact is, many of the reconciling items and expenses are those that First Solar would also have incurred. Examples include stock-based compensation expense, amortization of intangible assets, loss on change in European Government incentives and non-cash interest expense. Just these four items alone accounted for $0.85 of SunPower's non-GAAP EPS for 2012.
I believe that First Solar, similar to most publicly listed organizations, choose not to add back these type of items to non-GAAP EPS because it's grossly misleading. You'll note that on page 19 and 20 of SPWR's slides they provide lengthy reconciliations of GAAP to non-GAAP revenue, gross margins, operating expenses and operating income. You'll not see any such slides in First Solar's presentation because they only report GAAP revenue, gross margins, operating expenses and operating income. When constantly using non-GAAP performance indicators when talking about the company's results, SunPower is able to make their financial performance look much, much better than it actually is. On their Q4 conference call, they say that they expect significant growth in non-GAAP EPS for 2013 versus 2012. What does that mean? That they intend on adding even more reconciling items to GAAP EPS until they can show a favorable bottom line?
The problem for investors is that there are no regulations nor industry accepted practices when it comes to non-GAAP measures, other than disclosing how the company calculates the amount. I would urge anyone looking to invest in any company to stick to GAAP measures whenever possible in analyzing their financial strength and performance. To the degree that there are non-GAAP measures, such as EPS, only pay attention to those reconciling items that can be deemed truly one-time, extraordinary expenses, such as goodwill impairment and restructuring charges. Even in coming to what I called non-GAAP EPS in the above tables, I did not add back costs in excess of normal warranty expenses to get to FSLR's adjusted EPS.
So, in concluding a lengthy comparative of these two solar companies I think it is safe to say that First Solar is the financially stronger company, has had better historical financial results, has given better short-term operational guidance, has a vastly larger book of future sales, has a much more competitive cost per watt produced and is spending a great deal more on R&D to support their technology. So is it a good investment? It's currently selling at less than 65% of their book value and just over 5 times earnings for the trailing 4 quarters (when including expected Q1 results)...yes, it's undervalued and makes for a very good investment.
SunPower, unfortunately, is not a good investment at this time. They have yet to prove that they can grow sales to the same extent First Solar can, while not having experienced positive adjusted EPS since 2010. Their guidance is to lose money, (a lot of money), in the first half of this year, making it next to impossible for them to have positive EPS for 2013, making it three years in a row. SunPower is trading at more than 150% of their book value and even if they could somehow miraculously make $100M for 2014, that would only be $0.89 per share. At their current share price, they are trading at 13.4 times that. In my opinion, SPWR is very much overvalued.