By Robert Gordon
I love the fact that many executives, employees and investors believe that there is plenty of money to be made by moving toward a cleaner and safer energy economy that is not solely dependent on fossil fuels as we are today. That people believe that "drill baby, drill" is a charge for poorer health, and for only briefly evading inevitable environmental and energy crises. The biggest such company to be in this field of alternative energy is of course General Electric (NYSE:GE), the nation's leader in wind turbine manufacturing. But one cannot call General Electric a clean energy company per se, as its wind energy division is a small percentage of its overall business. I am going to look today at First Solar (NASDAQ:FSLR) a leader in the solar energy field that has fallen on hard times.
Since the presidency of Richard Nixon and the 1973 Arab Oil Embargo against the United States, each of the Presidents since then, inclusive of President Obama, have given public speeches on the need to expand our commitment to alternative energy to wean ourselves from our reliance on foreign fuels and environmental destruction. Rather obviously, we have, time after time, failed. The promise of solar energy actually exceeds that of wind, for enough solar energy falls on just a 100 square mile section of desert in the American Southwest to power the entire country.
The common misconception about solar power it is more expensive than what currently is the backbone of the energy production industry in this country, coal. That is only true due to the massive, taxpayer funded subsidies that the coal power industry receives. How much do American Electric Power (NYSE:AEP) or Consumers Energy (NYSE:CMS) pay toward the huge environmental and human health consequences of coal burning? These costs are borne by the public. The same applies to environmental devastation brought on by coal mining. Is the loss of hundreds of mountaintops in West Virginia fully paid for by Peabody (BTU)? No, the people of West Virginia do pay for that in their daily lives. With Solar Power, there are no inherent environmental, health or safety risks. If we removed the hidden subsidies from coal, and so a lesser extent from nuclear energy, solar energy would already be attractively priced.
First Solar came into existence in 1999 as a research and development company, and in 2002 began the commercial development of what became the single product that has earned billions of profits for the company, its thin film, modular solar cells. These products are not aimed toward home owners or commercial rooftops; they are designed to be used in utility scale projects.
The largest market for First Solar in recent years had been Europe. Due to a combination of weak economic conditions there, along with inexpensive Chinese solar panels being on the market, First Solar was the S&P's worst performing stock in 2011, down 86%. Making it worse it, that decline has not stopped, as the share price has fallen from over $35 per share at the start of this year, to today's price at the 52 week low of between $13 and $14 per share. First Solar and its peers have received some help as tariffs have been initiated on Chinese built solar units.
Adding fuel to First Solar's downward fire was a dismal first quarter of 2012 earnings report. The company's revenues of $497 million were down 12% from $567 million in the first quarter of 2012. There was a GAAP loss of $449 million, or $5.20 per share, compared with a profit of $116 million, or $1.33 per share in the first quarter of last year. Most of the loss was brought on by a $401 million restructuring charge, much of which was asset writedowns. Taking all one-time charges and credits away from the equation, and First Solar reported a non GAAP loss for the quarter of $6.7 million, or eight cents per share.
In response to the declining sales and evaporated profits of the company, there have been management shake ups. New CEO James Hughes and team have a new strategy. That is to focus on those parts of the world that can support a long term, sustainable investment in solar energy. These would typically be countries without cheap available alternatives to solar. The company's largest investor, the Walton Family of Walmart (NYSE:WMT) fame, is First Solar's largest shareholder with a 30% stake, and is now taking a more activist role in the company.
Saudi Arabia in particular fits the bill as a First Solar target, as it desires to make use of its climate for solar and preserve its oil reserves for foreign sales. It is planning an investment of over $100 billion in solar energy, and First Solar is in a position to gain some of that business. While First Solar awaits the development of overseas projects, First Solar has plenty of utility scale projects planned in the Southwestern United States, such as the 50 mw Silver State project, the 550 mw Topaz Solar Farm, and the 290 mw Agua Caliente facility. First Solar also has projects proceeding in locations including Australia and the Thailand.
With costs reduced due to restructuring charges, I am confident First Solar will be profitable this year, though I have no confidence in management's projections of $4.25 per share, with $900 million of free cash flow. Yet, even if cash flow and earnings are half management's projections, this stock has been seriously oversold. First Solar's balance sheet is still quite healthy with debt just 14% of capital, and over $600 million in cash.
New CEO Hughes has a track record of building business relationships overseas, and he should be able to make First Solar's case in Saudi Arabia, Australia, and elsewhere. I believe this stock has hit its floor, and has far, far more upside than downside from this level. I would not bet my mortgage money on this, but if you want to put some money at risk for the chance of tremendous returns, First Solar may be for you.