While First Solar (NASDAQ:FSLR) does currently have one of the highest trailing P/E ratios among the Solar Industry, that P/E is more than justified, and in my opinion, moderately mis-valued to the downside given their prospects for growth
- Oil prices have been on a steady uptrend for the last 20 years - the most important component to the future success of First Solar will be the long-term and continual increase in oil prices. This chart displays that oil prices are likely to continue their ascent as long as the global economy continues to expand. The higher oil prices are, the more economically viable solar energy becomes.
- First Solar has lowered manufacturing costs per watt for the last several years, and has an aggressive goal of $.52 per watt for 2014 - First Solar is the only solar company to be able to produce electricity below $1. Even more exciting is the prospect that First Solar is now within a year or two from being able to produce energy at a cost comparable to or cheaper than coal and natural gas. Coal and Natural gas make up 62% of the electricity produced (globally), so when Solar becomes a cheaper and cleaner alternative, subsidies will no longer be required and First Solar will be tapping into a massive market.
- First Solar maintains some of the highest margins in the industry
- Projected EPS growth of 19-20% annually over the next 5 years - current 2012 EPS is $9.26. EPS growth of 20% annually results in EPS of $23.00 in 2016. $23 times a conservative P/E ratio of 15 results in a $345.00 share price in 2016.
- Despite European solar subsidy worries, nuclear power shutdowns or scale-downs are occurring across the continent - Germany recently announced that it will no longer be using nuclear energy by 2022. Italy has also halted production of energy from nuclear power plants. Germany and Italy are two of First Solar's biggest markets, and the shutdowns require both nations to increase production in other alternative energies. This leads to solar being the likely candidate to benefit.
- Obvious environmental benefits
- Solid financials - First Solar has $6.45 of cash per share, and only $132 million in long-term debt.
- Superior technology - First Solar's thin films use cadmium telluride in their absorption layers. Cadmium telluride is exceedingly more efficient than crystalline cells, a common production of many of FSLR's competitors.
- Competitor weakness - many companies in the solar industry are having significant difficulties. Suntech Power (NYSE:STP), a major competitor of First Solar's, is suffering from extremely weak margins, showing the effect of their inferior and inefficient technology. In addition, at a 6-7% growth rate per annum over the next five years, their forward P/E is greater than that of their trailing P/E.
- Short shares are 43% of current float, making it a huge short-squeeze candidate
First Solar is the clear leader in the solar energy space. Superior and efficient technology in its solar cells has allowed it to reduce manufacturing costs close to the level that coal and natural gas are currently at. Aggressive yet realistic goals regarding its manufacturing costs make First Solar a very interesting growth story, while their shares are currently very reasonably priced. First Solar and the rest of the solar industry is a very risky short term play as subsidy issues stemming from the sovereign debt issues in the European Union could potentially hurt earnings in the near term. However, due to First Solar's efficiency and technology, it is close to being able to maintain and grow a profitable business with the lack of subsidies, making them a very good long term hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.