First Solar Inc (FSLR) is a solar energy company that operates out of two divisions. The components and systems division designs, manufactures and markets solar panels for individuals and small manufacturing companies. The larger photovoltaic (PV) division markets builds and maintains solar power plants that are used by utility companies, commercial industry companies and industrial companies. The components and systems division accounts for 35.2% of the company's revenues while the PV division generated 64.8%. The company has a market cap of $6 billion, and its stock price is around $59.
First Solar is one of the largest and most successful solar power company's in the world, yet it is still transforming itself. The company's main source of revenue comes from its PV division which builds and maintains power plants (commonly called solar farms) made of cadmium-telluride (CD-TE) thin film solar panels. However in recent months it has become clear that the company is transforming its business model in two ways:
The first change is to upgrade and diversify the company's technology. In April, the company purchased start up solar energy company TetraSun. Prior to the purchase of TetraSun the company had been limited to selling solar panels made of (CD-TE) thin film solar panels, but with the technology that it gained from the purchase it will be able to manufacture and market crystalline silicon solar cells by the middle of 2014. This is significant because high efficiency crystalline silicon solar cells can be used in smaller rooftop solar cell projects. This will allow First Solar to compete in the fast growing rooftop marketplaces of the United States, Japan and China. The company's CEO Jim Hughes said, "The TetraSun acquisition will give First Solar a foothold in markets where limited space requires a higher-efficiency product, such as rooftops."
In addition to the purchase of TetraSun, the company purchased a technology similar to their own from General Electric (GE) for 1.75 million shares of First Solar's common stock. The purchase was deemed to be positive for First Solar because in addition to benefiting from GE's advanced cadmium-telluride technology, the company eliminated GE as a competitor, and executed a multi-year agreement to sell GE their solar panels.
The second change in the company's business model was in the way that it looks to increase its business. Now instead of just marketing their PV units the company is evaluating potential markets and then purchases smaller "firms within those desired markets that have already completed most of the legwork involved (including entity formation, permitting, land acquisition, and internal financing)." For instance in August the company announced that it had purchased U. S. and Mexican development assets which included projects in California, Arizona, Texas, North Carolina, Georgia, Louisiana, Colorado, and Illinois along with several projects that were already involved in the emerging Mexican PV market.
First Solar' Growing Earnings
When First Solar reported third quarter earnings on October 31st many analyst and outside observers were surprised. The company had third quarter earnings per share of $2.28 per share which vastly exceeded analyst expectations of $0.99 per share. Also, the company upped its full year 2013 earnings prediction from $3.75 to $4.25 per share to $4.25 to $4.50 per share. The aspect of the earnings report that bode well for the company's future was the gross margin which increased to 28%, and which easily exceeded that of its closest competitor SunPower Corporation (SPWR) whose gross margin was 19.1%. The increased gross margin will give First Solar a significant pricing advantage over its competitors.
Since June of 2012, First Solar stock price has risen by over 400%. While those that invested in the company are probably pleased with the stock's performance, the stock price of several other solar energy companies have also performed extremely well. For instance over last year the stock price of Yingli Green Energy Holdings (YGE) is up 272%, while the stock price of JA Solar Holdings Co. (JASO) is up 227%, and the stock of Trina Solar Ltd (TSL) is up 518%. The point is, stock prices throughout the solar energy industry have exploded which leads me to wonder how high can they rally before they correct.
Many people believe that as the price of fossil fuels increase, companies that utilize renewable sources of energy will thrive. That is a big part of why, the stock price of renewable energy companies have rallied. Of the companies in the solar energy market First Solar is the leader in terms of size and consistency of earning. The company has turned a profit in each of the last six quarters and after losing $96.3 million in 2012 it has earned $287.7 million through first three quarters of 2013.
Despite the good earnings news the price of the stocks in the solar industry have made an extremely powerful rally, and may be overvalued. Fortunately First Solar's stock (price to earnings ratio 12.3/price to book ratio 1.35) does not seem to be overvalued. However over the last year its stock price is up by over 115% and up by 18% since it reported earnings on October 31st. So while I believe that First Solar's stock price will continue to trend higher, I expect that it will experience a pullback in the near future.