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First Solar Versus The Solar Industry

Jan. 10, 2013 1:02 AM ETFirst Solar, Inc. (FSLR)32 Comments
Trent MacDonald profile picture
Trent MacDonald

As many investors who closely follow First Solar (NASDAQ:FSLR) may remember, I wrote an article on the company back on November 6th. At the time I wrote the article, shares of First Solar were trading at approximately $22.50 and I predicted they could easily double by the middle of 2013. They've been on the rise ever since. Given the run-up in the stock price since that time, in combination with an earnings release only one month away, I thought this may be a good time to revisit the company.

What I love most about investing is when I'm able to find a pure value play amidst an industry under pressure. The solar industry, as has been written about to exhaustion, has had a glut of over-supply. Chinese companies have flooded the market with inexpensive photovoltaic panels and the trend does not seem to be reversing. Recently, Barrons published an article wherein renewable energy analyst Gordon Johnson was interviewed and painted a very bleak picture for the world solar industry and, more importantly to me, First Solar. While I actually agree with a fair amount of the article as it relates to the historical challenges faced by the industry at large and many of the companies within it, it would appear to me that Mr. Johnson has made the same mistake many analysts and investors have made in relation to First Solar, and that is to paint it with the same brush as the industry itself through use of far too many generalizations. Let's face it, a company will, more often than not, be compared to its industry index. If an industry falls out of favor, a good company's stock can easily decline, even if the individual company's fundamentals are strong. Such is the case with First Solar. While the entire solar index has enjoyed a rebound over the past several months, for most solar companies, much of

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Trent MacDonald profile picture
Trent MacDonald lives in Nova Scotia, Canada and graduated from Saint Francis Xavier University in 1995 with a Bachelor of Business Administration Honours Degree, focusing on Finance and Accounting. In 2000, Trent earned his Chartered Accountant designation, the equivalent of a US based CPA. In 2006 he was awarded the Pictou County Chamber of Commerce Entrepreneur of the Year Award. Since, Trent has worked in several Senior Executive positions within Canada’s second largest grocery retailer, namely as Vice President Finance, IT and Pharmacy Development for their pharmacy division, then Regional Vice President Finance in Ontario then Atlantic Canada. He has also served as Vice President Tax and Special Projects for their National Organization. Trent started investing seriously more than a decade ago and, through his success, now does so on a full-time basis. Given his work with publically listed organizations, both as a Senior Executive and through Public Accounting, he understands what drives shareholder value. He takes this same approach to his own due diligence and sees himself as a value investor most, but enjoys short-term and day trading when opportunities present themselves. Outside of investing, Trent enjoys family life, coaching, sports (both playing and watching) and spending time with friends.

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Comments (32)

jerryf01 profile picture
I'm long and will continue to be in/on FSLR, and I wouldn't touch a Chinese stock with your money. But FSLR is money coming home to me.
Chinese stocks are on the same level as penny stocks, always a gamble and odds are stacked against you. JMHO
Thank you!

I will repeat this again. This "research paper" posted by zjkiss does not replicate real world conditions of a damaged First Solar CdTe module discarded in a landfill. Lets review some of the highlights:

(1) they took a 2"x2" piece of a module and soaked it in 3/4" cup of water for ~6 months. After this time a significant amount of cadmium had leached into the water, approximately 4X the EPA limit for concentration.

(2) they also soaked a piece of First Solar CdTe module in strongly acidic solutions (one with a Ph = 3. Think pure citric acid strong). In this test the module had delaminated).

These two essential conclusions led the author to conclude that "If damaged, CdTe photovoltaic modules are exposed to essentially pure water, the leaching of cadmium is small but as the pH diverges from 7, leaching effects increase by a factor on
the order of 100. Thus, when such modules are discarded and thrown into real world dumps or landfills, they will constitute a serious pollution hazard from leached cadmium."

Really? That's a pretty big leap! Where is that analysis?

The author continues: "If CdTe were the only practical photovoltaic technology, we might have to accept the environmental risks, but such is hardly the case. Several other quite acceptable technologies exist without the presence of carcinogenic components."

This is the real red flag for me. A statement like this cannot, should not, and will not be part of a legitimate, peer-reviewed research paper.

I am done with discussion. More important issues to address.
Dope Threat profile picture
Red herring ZJKiss, no matter how many times you repeat it. Perhaps worth consideration when the stock was at $300, not so much at $30. Long FSLR.
Zoltan Kiss profile picture
Mr Destructo
To your points 1) The test conditions for the CdTe First Solar modules were exactly what the ph of rain is in our area 2) If you put other thin film modules in the same environment (aSi, CIGS), there is no observable solubility 3) Mr Destructo GE Financials investing a few million dollars into a 10MW power project in Australia does not erase the fact that they abandoned more then a $600 million investment into a CdTe manufacturing technology (not even speaking about Iffel's reputation) 4) I hope others reading Seeking alpha gained something from these comments. A Faceless and Nameless Mr Destructo hurling insults and claiming the ability to "smell bad science" is just not credible
chaz7342 profile picture
my point is that China solar is going to outperform US solar going forward because their government is behind it. and not to mention that FSLR's thin-flim can't compete with poly anymore because the price of poly has come down so much.
bill d profile picture
So who is "propping up" FSLR? If these Chinese companies are so great why does the Chinese gov't have to continue to pour billions into them?
That party won't last - their gov't has already made sounds they may be evaluating their "investments" a little more carefully. The import tariffs didn't help too much.
IMO, china's solar industry will be worth more than the US'. I'm not saying Asian solar stocks will outperform because its hard to predict which Chinese solar shops will be forced out of business during the government's consolidation efforts, but overall the remaining Asia-based players will have clearer access to China's planned solar boom (China supposedly increased its GW installation target from 21 to 40GW in 2015!?!?). Should the trade war continue, US solar companies may not have access to this growth.

Nonetheless, the remaining few US solar companies could benefit form an expected rise (albeit a relatively slow rise) in US solar investments, which could help US solar stocks. This assumes that the cheaper china modules do not compete for US bids... which is unlikely because china is shifting production to asian countries that don't have trade tariffs, and may ship form there. SPWR may survive because of its downhill partnerships; but most other US installers may seek cheaper module imports to improve profitability.
chaz7342 profile picture
since Dec 12th when China announced the 2 billion in subsudies and committed to let some companies fail, TSL, YGE, LDK, JASO, and CSIQ are all up over 60%. FSLR is up 1% during this same period.
So? FSLR is up over 40% since mid November. What's your point exactly?
Zoltan Kiss profile picture
Mr Destructo

Since you could not find the Japanese conference reference related to the toxicity of CdTe, it is uploaded for your convenience on the website where the "research paper" is http://bit.ly/13t90PN ( please forgive the condition of the site as it is under construction). The main author of the paper is Dr Juergen Werner, of the University of Stuttgart, a most respected authority in PV. The conclusion of the paper is, that CdTe is highly water-soluble in anything but distilled water and each MW of installed CdTe will contain 179kg CdTe . First Solar so far installed over 6GW, representing 1000 tons of CdTe spread over the Globe.

Now to your comment that you do not take "research papers" coauthored by a competitor seriously, - you are correct, that paper has not been published yet (as I disclosed to you in my previous comment, the paper was submitted), and I believe that in this forum we all are persons of integrity. In that research paper we have presented the facts as we observed them using the most advanced scientific techniques and equipment. Now what we do with those facts, it is our responsibility. I remain surprised that the market (in its infinite wisdom) so long ignored the environmental issue of Cd.

There are two contrary examples of Cd sensitivity that might be of interest to you. McDonalds gave out as a gift painted cups where the paint included a fraction of a microgram of Cd. After a consumer uproar, all the mugs were recalled and destroyed.
The other example is more noteworthy for investors of First Solar. GE, our finest high tech company, after putting $500 million into CdTe manufacturing facility, has abandoned the project and wrote off the investment.

I spent my professional lifetime working in renewable energy. The Earth resources are strained beyond capacity. I believe PV will become in the coming decade the lowest cost of energy source. A carcinogenic episode with CdTe could derail this scenario. Mr Destructo I invite you to work with me to leave a friendly Planet to generatinos after us.
(1) Your test isn't realistic. Your test conditions will never occur in real life.

(2) I can put any exposed hazardous raw material into a vat of liquid and record leaching. So what? The results of this test mean nothing.

(3) GE stopped development of the plant in CO because of economics, not the dangers of CdTe technology. Witness GE Energy's recent investment in a First Solar developed plant in Australia:

(4) Also you have me all wrong. I have seen the good and the bad of renewable energy but I am a believer. One thing I do know is I can smell bad science pretty easily.
Zoltan Kiss profile picture
First allow me to address the comment by "Dope Threat" that the carcinogenic argument is "stale". I agree, the issue is old. It was raised
even before First Solar existed. Cadmium is one of the most toxic and carcinogenic elements. Most countries do not allow the use of Cd in applications where it may be exposed to human contact, and restrict other sues of cadmium. http://bit.ly/VYnzWs

The tragic spread of CdTe PV technology was facilitated by studies claiming that CdTe is not water soluble and is safe encapsulated between two pieces of glass, as in PV modules. The topic was discussed at length by this author in the comments following an article by Bill Mauer on Dec 1 2011 ( "A bright idea; Get out of solar while you still can") in the pages of Seeking Alpha .

The bottom line is that CdTe is water soluble. Water can get into the module through cracks in the glass, where it will spread by capillary action. Where the water spreads, the top glass will separate from the substrate and eventually the module will fall apart. Since that discussion on the pages of Seeking Alpha, First Solar has installed another 1.5 GW of CdTe PV, covering approximately 50 million additional square meters of land. Some of this is the finest land in America like the Central Valley of California. This is the result of this threat becoming "stale" for us.

A second reader "Mr Destructo" asks for the reference on water solubility of CdTe. This also is given in reference in the comments following Bill Mauer article.. For convenience I repeat it here; ( “21st International science and engineering conference on PV Nov28 to Dec 2 2011 Fukuoka Japan. The paper TOXIC SUBSTANCES IN PV MODULES J.H. Werner et al, University of Stuttgart “ ) If you are interested in further detail, a complete scientific paper as submitted for publication "water solubility of CdTe in a glass to glass sealed PV module" can be found "http://bit.ly/13t90PN" ( "Water solubility of CdTe" ).This scientific observation was repeated by a number of labs and confirmed (see the japanese publication).

I don't give much credit to a "research paper" co-authored by a scientist from a defunct solar company competing with First Solar and a PHD at a no name university that doesn't even list the paper on his university web page. Probably because it isn't peer reviewed or published.

This other paper from the conference in Japan is nowhere to be found anywhere on the internet that I can find. I can't even find a link to it for purchase.

This is a non issue IMHO until someone can present some REAL long term research on the subject. I'll be waiting.
Fred W profile picture
"Investors" will be very surprised by what FSLR has buried in its books. Many skeletons hanging around--delamination, leaching of toxins from their products into ground water, low efficiency compared to most c-Si and the habit of selling things and projects to "itself" at an unsupportable markup(fleecing the U.S. taxpayer).
Please provide a link supporting one of these assertions you have made.
Re: your assessment of FSLR's technological performance - I would suggest that you do a bit more investigation in this area. Thin-film PV typically has lower conversion efficiency than any state of the art crystalline PV and with the huge drop in prices for PV silicon wafers/cells over last year has lost any cost advantages as well. Interesting financial analysis, however.
Trent MacDonald profile picture
While I will not pretend to be an expert in the field of photovoltaic technology, based on what I've read, CdTe technology, even at today's lower silicon prices, have a faster payback, especially in hot climates such as those found in India and the Middle-east. As you say, they may not have the conversion efficiency in some cases, (although this is debated in hot temperatures), but the up front investment remains lower. While the cost of silicon may still continue to fall, making it even more competitive, you should note that FSLR has been continually decreasing it's cost of production at the same time, thus staying ahead of the curve. They are also working on new technolgies themselves that will increase conversion while remaining price competitive. I'm just not as convinced as many of the other analysts that they will be unable to compete based on their current and future technology.
Conversion efficiency is only half the story. On a cost per watt basis FSLR technology is very competitive.
Also, because of thin-film's and CdTe's lower inefficiencies, I would assume more land is needed to produce the same amount of energy (since modules can't stack), raising BOS costs, which are now more than that of the modules. Can you please explain?
Zoltan Kiss profile picture
The maximum liability for First Solar remains that the basic technology,CdTe, is highly carcinogenic and water soluble. Thus it remains a real threat to the water table. For whatever reason no one seems to pay much attention to this environmental issue. If this aspect will come into focus again, I believe sooner or later it will, this is a game changer.
Further liability is the emergence of ternary thin film devices. They are more efficient without the Cd baggage
Proof please? Do you have knowledge of this technology and how the Cd might leach into the environment from a sealed container? I would love to read about it!
Dope Threat profile picture
This is pretty stale zjkiss. Bears have been trying to push the negative CdTe environmental story for five years now. It's addressed in FSLR's risk disclosures, and has been for years.
BOBTHEJOCKEY profile picture
I am learning that because I read everything about solar the arguments against solar just don't make any sense. It's kind of cool how that happens. An investor is like a judge making a big decision based on the sheer logic of the pros and con arguments put before him.
BOBTHEJOCKEY profile picture
Is a restructuring charge a one time charge when you close a factory? Is it such charges as severance pay for the employees you are laying off? Costs of selling the empty building etc etc. I see so much of this in solar it would be a good lesson here in someone actually defined the term a little.
Trent MacDonald profile picture
Hey Bob. In answer to your question, typical restructuring charges include a number of one-time costs such as severence (salary continuance) for impacted employees, write-down of assets (including equipment and buildings) to net realizeable value, write-off of any capitalized soft-costs such as R&D related to the discontinued projects or operations, etc. FSLR decided to pull-out of Germany, so many of these such costs would have been included. There were also many other costs. The exact details of these costs, including descriptions of all things they've classified as "restructuring", are actually contained in notes to their financial statements and can be found on the SEC website.
Trent, as an accountant, I think #3 is likely to be your blind spot. Just how much do you know about First Solar's tech relative to the rest of the industry, and how the trends are going?
Trent MacDonald profile picture
I definitely see what you are saying, however, investing in a company for me is really about estimating sustainable earnings comparative to current company valuation. In the case of FSLR, they have $9B in forward contracts, which buys them a lot of time for technological advancements. That said, I would be naive to invest in a company today whose technology is vastly over-rated, thus setting the shares up for a downward slide due to an inability to sustain sales levels. Thus my comfort level given the degree of already signed forward sales. In direct answer to your question, there are competing views on their technology. Thin film, which is used by FSLR, is said to perform better, have greater energy conversion and quicker investment payback than standard photovoltaic technology when operating in temperatures above 25 degrees celcius. There are plenty of studies illustrating this very thing. In addition, FSLR has sunk a lot of R&D, resources and partnership time into furthering their CdTe, (Cadmium Telluride), technology, which I believe will pay huge dividends down the road.
I believe that some of the statements are incorrect, but am willing to hear you out. Thin film has far less conversion efficiency than poly-based units. Also, I would like to know how you came up with the idea that thin-film's payback period is faster when a) poly and thin-film module prices are essentially the same now and 2) thin-film's BOS costs are higher than poly's.

Again, I haven't followed this industry in years, and admit that my info could be off; but I would like to know your sources of info.
FSLR is actually the BEST performer within SPX in 2H2012. Congrats Trent!

Notwithstanding its run-up it still appeared as one of the most attractive stocks when I ran my GAPE screen last week. I believe it will continue to outperform in the coming 6-12 months.
rh, the operating profits are good; the chargeoffs for goodwill and restructuring led to net losses in 2009-2011. He's noting that the chargeoffs are now about complete (one more $70 mill hit on net earnings), but that operating profits will continue to grow thanks to restructuring.
Can you please explain how both of these are possible, I am a bit confused by your statements #5 and #6 in relation to each other:

"While not as high as the historical levels experienced prior to the industry over-supply issues, the company is able to make money and is on target to earn at least $4.75 per share for fiscal 2012 and more again in 2013 and beyond, resulting in a dramatic undervaluation when compared to today's trading value."

"In 2012, they will, in all likelihood, have another net loss of approximately $70M, the result of which will include $475M in restructuring costs."
Trent MacDonald profile picture
I could have been clearer in this regard. FSLR, not dissimilar to the vast majority of publicly listed companies, has always reported it's EPS after one-time charges and extraordinary expenses, which for them are warranty expenses in excess of normal levels. While they will experience an actual loss of approximate $70M for 2012, this includes $475M in one-time restructuring charges. To properly compare to past and future years on a normal operating basis, the one-time charges have to be backed out. As such, adjusted EPS should approximate $4.75.
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