A couple weeks ago, Goldman Sachs included First Solar (FSLR) in its list of 40 cheapest stocks in the market. At the time, First Solar was trading for $41 per share and it fell further to $37 since then, which means it got even cheaper. In this article, we will take a look at First Solar to see how it is doing and how it is likely to be doing in the future.
In the last quarter, the company missed badly on estimates and lowered its guidance. The company earned $0.39 per share on revenue of $519.8 million which was far below the analyst expectations that were looking for $0.52 per share and $720 million. The midpoint of the new guidance called for $3.7 billion in revenues, lower than the previous guidance with a midpoint of $3.8 billion. For the full year, the company expects to earn $3.50-4.00 per share (midpoint $3.75 per share) down from analyst estimates of $4.14 (if it wasn't for the secondary equity offering and the new shares created for GE, the midpoint of the EPS would have been $4.00).
These results triggered another round of sell-off on top of a sell-off that was already happening at the time. Prior to the results, First Solar's share price fell from $50 to $45 and it fell all the way to $37 in the next two weeks after the earnings report. At this point, the sell-off looks overdone and the company looks grossly undervalued compared to its peers even after posting bad results.
During the quarter, there were two exciting developments for the company despite the bad financial results. The first development was a comprehensive partnership between First Solar and General Electric (GE) and the second development was a set of improvements in First Solar's products and processes, which will prove profitable in the future.
First Solar's partnership with GE is significant. GE agreed to sell its cadmium-telluride solar intellectual property to First Solar for 1.75 million shares of the latter company. Furthermore, GE agreed to hold onto those shares for at least 3 years which will make GE one of the biggest shareholders of First Solar. Currently, GE's 10-cell research cell efficiency rate is at 19.6% which is the highest in the industry. While First Solar's own rate is somewhat close to this figure at 18.7%, most companies fall far behind this rate. The transaction passes GE's 450 related patents to First Solar's portfolio, which will give the company a competitive advantage in short and long terms. With the addition of these patents, the number of patents in First Solar's portfolio will double effectively, nearing 1,000. First Solar and GE will also become clients of each other, buying products and services from each other. For example, First Solar will sell GE modules which can be huge because GE installs 34GW of renewable energy every year and First Solar will provide GE with a lot of parts and modules for these installments.
The second exciting development in First Solar was centered around the quality improvements. First Solar's "Series 3 Black Module" passed both tests conducted by TUV Rheinland and became the first thin-film module ever built to accomplish this. These tests look at whether a product can function at least at basic level through different weather conditions such as extreme heat and extreme coldness. Passing these tests is very important because it will allow First Solar to get contracts in places with varying weather conditions more comfortably.
The last quarter was the company's most efficient quarter ever. Production was up 5% to 389 MW. The capacity utilization was up by 12% to 75% and conversion efficiency was up by 0.4% to 13.0%. First Solar's cost-per-watt in the quarter was 67 cents, down from 72 cents a year ago (and 70 cents in the last quarter) and an all-time low. Excluding under-utilization and upgrades, the cost-per-watt was as low as 63 cents. These are very encouraging numbers as we move forward. One of the biggest reasons solar companies go bankrupt is because they aren't very efficient and First Solar is pretty strong in that area.
At a time when many solar companies struggle to post a profit, First Solar enjoys strong profitability. The company's current P/E ratio is 9.8 and 6.6 excluding cash; whereas, the industry average is well-above 30 (in fact, most solar companies don't even have a P/E due to negative earnings). First Solar has minimal debt at $255 million compared to the company's cash of $1.29 billion. The company's price to book value ratio is 0.9 compared to the industry average of 1.8. First Solar's price to cash flow ratio is around 5 whereas the industry average is around 8 excluding the companies that have negative cash flow.
In the next decade, many countries in Europe, Asia and the Middle East will be investing huge amounts of money in order to switch to green energy which includes solar energy. Just to give an example, Saudi Arabia alone will be investing $109 billion in solar energy in the next couple of decades. There is a huge market and huge growth opportunities for solar energy companies and First Solar is one of the most efficient and cheapest solar companies in the world. The company's profitability makes it a much safer bet than most solar companies that are burning through cash each quarter.