US solar stocks have not exactly been one of the best investments out there in recent years, thanks to the crushing onslaught of competition from low-cost Chinese solar panel manufacturers, but First Solar, Inc. (FSLR) plans to shield or rather save itself by a major shift in business strategy away from manufacturing solar panels for subsidized markets to become a vertically integrated energy company that builds and operates power plants. So does that mean its time to revisit First Solar as an investment or is it still too early to tell whether these plans are too little, too late?
Some Background About First Solar
To begin with, I should mention that Tempe, Arizona-based First Solar was a solar industry pioneer, with the company being founded in 1990. First Solar then went public on the Nasdaq in 2006 priced at $20 a share only to rally to $24.74 at the end of its first day of trading and to trade as high as the $300 a share level in 2008. However, and as of the last week of September, First Solar was trading at around $21 a share - meaning any investor who got in at or near the top and stayed in has lost a considerable amount of investment.
Likewise, investors have not faired much better with the handful of other US solar stocks, namely SunPower Corporation (SPWR), nor for that matter with Chinese solar stocks like JA Solar (JASO), LDK Solar (LDK), Suntech Power (STP), Trina Solar (TSL) and Yingli Green Energy (YGE). On the other hand, investors should also be glad that these stocks have not gone the way of Solyndra and a few other industry names.
First Solar's Shift in Business Strategy
For much of its history, First Solar's business strategy has been to manufacture and sell its solar products to solar project developers, system integrators and independent power producers, with much of the market being in Europe where countries like Germany and Italy have become the biggest solar markets in the world by offering heavy subsidies to encourage the installation of solar panels. However, with the European financial crisis, the future of many of those renewable energy subsidies is in doubt.
Hence near the end of last year, First Solar announced that it would be changing its business strategy to move away from fickle subsidized solar markets and bet its future on sales in countries where providing low-priced equipment and engineering services can still make money and be competitive against Chinese solar panel manufacturers. At the time, First Solar's CEO Mike Ahearn gave few details other than to say that a new three-year plan would be unveiled in 2012. Ahearn was also replaced as CEO by James Hughes back in May (Ahearn is now the Chairman of the Board).
Since then, we now know a few more details about First Solar's new business strategy. In his first interview since taking the CEO position, Hughes told Businessweek in early September that First Solar intends to build new solar projects from the Middle East to Australia (where there is plenty of sunlight), using its proprietary systems to help power-purchasers manage the amount of energy they buy from solar farms and help them predict the uneven power flows that result from solar panels verses other sources of electricity (e.g. coal burning power plants). That will involve buying land, securing regulatory and environmental permits to build, striking deals with energy companies to buy projects and then negotiating agreements with utility companies to purchase electricity at fixed rates over a period of 20 to 30 years.
Clearly, there are still plenty of what-ifs with the above changes, but what is also clear is that First Solar's old business strategy of focusing on manufacturing solar panels for subsidized markets is no longer viable. On the other hand, that does not mean the company's new business strategy is going to be any better as the details still seem rather sketchy plus short sellers are also betting heavily against its success.
Wall Street remains just as skeptical. In a recent interview, Cantor Fitzgerald analyst Dale Pfau noted that the real earnings power of First Solar from 2014 onward is difficult to ascertain and he has maintained a sell rating since April. He also added that valuing First Solar during the transition is also difficult - let alone knowing what the company and its earnings stream will look like in a few years.
In addition, the Chinese solar manufacturers have similar ideas about getting into project management. And while their technology and project management skills may not be as good or efficient as First Solar's right now, one should never count the Chinese out as they have already shown their ability to largely wipe out their competition in the solar market.
I, for one, have long detested solar stocks in general because, after all, the United States (at least) is increasingly awash in cheap natural gas (and even oil) from shale and will likely be so for the foreseeable future (unless our misguided politicians continue to try and lock it all up in national parks or ban the use of fracking to extract it). Hence, before you jump into any alternative energy or solar stock, like First Solar, it might be a good idea to wait until after the elections are over with to see if there might be some much needed policy changes at the national level that recognize the benefits of natural gas over other forms of energy.
A Final Word About First Solar: Remember J.C. Penney?
As for First Solar's stock, investors should be extra cautious as its change in business strategy vaguely reminds me of Ron Johnson's attempts to turn around ailing retailer J.C. Penney (JCP), which has quickly proven to thus far be disastrous for the company and for investors alike. Then again and if you believe that solar energy actually has a future without taxpayer subsidies (a big "if" at least in the near term until the technology improves), First Solar might still turn out to be a better investment than what's left of the solar energy industry both in the US and in China.