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* Strong supporter of mr. Warren Buffet's, mr. Benjamin Graham's and mr. Peter Lynch's approaches. * Used to be a generator of sustainable alpha before 2014, then went heavily against USD - that didn't work out well. ) Bio: Investor from CIS 2010-present: Asset Management at the most... More
  • First Solar's Splendor 0 comments
    Apr 30, 2013 2:15 PM | about stocks: FSLR

    An admirable side of a great business is the ability of Management to overcome challenging times and the determination of corporate culture to keep the yellow jersey of leadership despite unfortunate environment. I am talking about strong character, willingness to go forward, while everyone is about to give up, and ability to make foresight decisions.

    Getting acquainted with First Solar

    Whilst studying First Solar (NASDAQ:FSLR) a couple of years ago, I realized that this was the most prominent company in PV (Photovoltaic) industry:

    * The largest company with the market capitalization of about 11 billion USD. Interestingly, the company had low level of debt, as implied by an EV of about 10-11 billion USD.

    * The most profitable industry player with the following 3-year averages: Operating Margin at 38%, Profit Margin at 28%, ROA at 20%, ROE at 26%. It is Important to note that ratios over 3 years were sustainable and averages provided a fair overall picture.

    * The largest Research & Development capex between 3% and 4% of Revenue, which is greater than that of competitors' 1%-2%.

    * The last point, key for surviving, is that FSLR's Debt to Assets ratio stood at 5.5%, while at the same time competitors' ratios were between 23% and 50% (which ended badly for a bunch of now bankrupt PV companies). The amount of PV-cell producers prior to the industry's overproduction crisis was around 150 or more. By now, only half of them managed to survive.

    Brief coverage of the market surplus crisis

    In 2008 price per kg of polysilicon (raw material for PV-cells) was 400-450 USD due to lack of raw material for photovoltaic cell production. However, everyone knew back then and still knows that mankind will be developing sources of renewable clean energy. For instance, according to Solarbuzz (specialized information agency), the global solar power market, as measured by annual volume of solar modules delivered to installation sites, grew at a compounded annual growth rate (OTCPK:CAGR) of 73% from approximately 1.75 gigawatts (GW) in 2006 to around 27.4 GW in 2011.

    People put two and two together and started investing into polysilicon and PV-cell production so that available amount of poly and cell increased by n-fold. At the same time, pace of global PV-installation slowed down in 2010-2011, which caused massive surplus. Therefore, prices for poly and cell declined dramatically. Currently, the cost of poly is about 17 USD per kg, and cell costs about 80 US cents per watt. Back then, in 2009-2010 the cost was 4-5 US dollars. By now, I believe more than half of producers are lost, and those that survived are now more or less unprofitable. Huge losses and consolidation are the scourges of the PV-Industry.

    Nothing lasts forever

    Technology is currently more advanced than it was before: PV-cells are cheap and efficient and PV-generated electricity now could cost as much as from the traditional fossil energy sources. US, China, Saudi, Australia and South Africa are replacing Europe as a primary market for solar energy industry players. Global installation of PV-modules still grows at 25-30% annually and this pace might increase. I have noticed positive changes on balances - inventories have stopped rising and prices on polysilicon went up 12% since Dec 2012.

    I have expressed my admiration for excellence of some businesses. FSLR is one of them. Despite all the troubles, the industry has come through; FSLR is standing firmly on the ground, being perhaps the only large company that managed to upturn its business in the time of troubles. Currently, FSLR is not just a PV-cell producer, but it is a project company that produces PV-cells, builds solar-farms, maintains them and provides other services. It has obtained 2.8 GW projects in California, Arizona and worldwide for execution in the next couple of years. Thus, FSLR is probably the only PV company that is not in desperate struggle to find customers.

    Ability to transform the business from just production to full-service operations during challenging times is unique! I admire FSLR's Management!

    In 2011 the company's executives stated: "… our goal at First Solar has always been to drive. And to do that, we must find a way to grow dramatically, notwithstanding a challenging environment." - I believe in it, as the management has already proved that FSLR can overcome challenges.

    Currently the company looks good:

    * Still the largest company with the market capitalization of about 3-3.6 billion USD and EV of approximately 3 billion USD.

    * Slightly unprofitable, yet in a better shape compared to huge losses of other industry players, with 3-year averages, as follows: Operating Margin at18.65%, Profit Margin at 7.21%, ROA at 4.32%, ROE at 5.6%. If there were no restructuring costs, FSLR would be still profitable.

    * The largest Research & Development capex at 4.2% of Revenue.

    * Debt to Assets ratio at 8.86% vs. competitors' 36%-70%.


    By and large, I believe that solar energy is a major clean-energy source and that over time technologies will bring more efficiency and the overall acceptance to the industry. The crisis will not last forever, and if some companies have a chance to regain profits and increase them n-folds then First Solar could be the first one to do this.

    If I am at least 30% correct then FSLR will bring more than 100% of return over 2014-2015 to its stockholders. A perfect storm has just finished or about to end, it is time to pick the best solar-energy stocks.

    I am a holder of FSLR since the stock traded 26 USD per share and I plan hold it until maturity. :D Just joking. I will hold it for a very long time.

    FLSR common stock prices (volume weighted average per annum) were as follows:

    2007 - 270

    2008 - 134

    2009 - 133

    2010 - 130

    2011 - 33

    2012 - 30

    Now - 40-45

    This is far better than any other PV company that I have looked at. The only risk is in the employed cadmium telluride ("CdTe") technology - it may not have the future. But this is yet a vague question

    Damir Babanazarov

    Disclosure: I am long FSLR, INTC, TSL, UA, SBUX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: FSLR
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