First Solar Inc. (NASDAQ:FSLR) is a company that designs and manufactures photovoltaic solar systems (PV) and solar panels that convert sunlight into electricity. The company has two divisions. The larger is the photovoltaic division, which manufactures, markets, and maintains utility scale solar energy power plants. Their utility scale power plants provide electricity to utility companies, industrial companies, and commercial companies. The second division is the components and systems division which manufactures and markets solar panels for individuals and small businesses. First Solar has a market cap of $5.1 billion and a stock price of around $53.
On January 6, First Solar's stock took a 9.6% drubbing on almost double the normal volume after it received a downgrade from Goldman Sachs analyst Brian Lee. Over the week, the stock moved higher and ended up gaining 4.4%. That is about par for the course for this stock. Whenever it takes a hit as a result of a negative story it bounces back. The reasoning behind Mr. Lee's downgrade was that the company was not adequately prepared to compete in the fast growing residential solar market. While it is true that First Solar is not a big player in the residential solar energy market that may not be a good reason to downgrade the stock. The company is a clear leader in the much larger and fast growing utility scale solar energy marketplace, and that is a good place to be. I believe that because of its size, and unique positioning in the solar energy marketplace, that First Solar is the safest solar energy stock pick.
Why First Solar is the Safest Stock Pick
As a leading manufacturer and maintainer of utility scale power plants, First Solar is in the prime area of the solar energy business. This is the area of the solar energy business that allows First Solar to enter into the kind of high revenue, long term contracts that make it possible for the company to accurately predict revenues and earnings.
One of the reasons that I consider First Solar to be the safest investment in solar energy is because of its consistent profits. Since the company transformed itself from a money losing residential energy provider to a utility scale solar energy provider it has consistently reported profits. First Solar has reported a profit in each of the last six quarters and in eight out of the last ten quarters. For a solar energy company, this kind of consistent quarterly profit is very unusual.
In addition to consistent profits, First Solar has realized strong earnings growth. In the third quarter, the company increased revenues by 50% to $1.26 billion and net income by 121% to $195 million on a year-over-year basis. This kind of growth is a key reason why investors have been attracted to First Solar. For instance, First Solar's closest direct competitors, J. A. Solar Holding Co. Ltd (NASDAQ:JASO), increased revenues by 6% to $1.75 billion, and while increasing net income by 36%, it still lost $273 million.
A third reason that I consider First Solar a relatively safe pick amongst solar energy stocks is because of the size and direction of the utility scale solar energy market. Last quarter, 2.5 times more utility scale solar output was built than residential solar output. In addition, the cost of building utility scale solar projects was 57% less than the cost of building residential energy projects.
Looking into First Solar's Future
While the residential solar energy stocks have been on quite a roll, First Solar's stock has also performed well and is up by over 60% in the last year. Despite its place as the Number 1 utility scale solar energy provider, First Solar is not ruling out competition in the residential solar energy market. In April of 2013, First Solar purchased the TetraSun Company which produced the kind of high efficiency crystalline silicon solar cells that can be used in rooftop solar cell projects. At the time of the purchase, First Solar's CEO Jim Hughes noted that "The TetraSun acquisition will give First Solar a foothold in markets where limited space requires a higher-efficiency product, such as rooftops."
Currently, the fastest growing solar energy stocks are residential energy stocks, such as SolarCity (NASDAQ:SCTY) up 357%, and SunEdison (NYSE:SUNE) up 289% over the last 52 weeks. However, the residential solar energy market has been notoriously unpredictable, and after such a run up in their stock prices, along with negative profit margins, [(NYSE:PM) Solar City -38.5% and SunEdison -15% (versus First Solar's PM +12)] how long can the stock of these types of stocks continue to rally?
First Solar, however, is in an enviable position of the solar energy market. It is the leader in the fast growing utility scale solar energy market and appears to still be growing. At the end of the third quarter, it had a 2.7 GW work backlog up from 2.6 GW's in the prior quarter. In addition, during the third quarter earnings call, the company increased its next full year earnings prediction from $3.75 to $4.25 per share to $4.25 $4.50 per share.
First Solar's stock price makes strong moves whenever there are positive or negative news stories about the company. However, the stock has consistently trended higher, and since June 1, 2012, the stock has rallied higher by over 440%. After the recent hit to First Solar's stock price, now is a good time to buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.