Why We Think First Solar Is Significantly Undervalued

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FSLR: First Solar logo
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First Solar

First Solar (NASDAQ:FSLR), the largest U.S. solar equipment manufacturer, has seen its stock price decline by roughly 40% this year, amid weaker contracting activity in the U.S. utility solar market as well as falling panel pricing and demand.  While the concerns are legitimate, we believe that the stock remains oversold, given First Solar’s solid technological advantage, sound financials and relatively conservative valuation multiples. Below we explain why. 

We have a $50 price estimate for First Solar, which represents a 30% premium over the current market price.

Cd-Te Technology A Big Plus In A Commoditized Solar Market

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First Solar has been investing considerably in developing its cadmium-telluride technology, and we believe that this should provide it with a performance and cost edge relative to the largely commoditized silicon technology that most other solar players deploy. For example, First Solar’s average efficiency improved by over 3% to 16.2% over the last three years, compared to silicon-based players who have seen relatively negligible gains. Moreover, First Solar expects to achieve 19.5% module efficiency by 2017, putting it well ahead of most silicon-based panels. As Cd-Te thin-film panels have a higher theoretical upper limit for efficiency compared to silicon panels, First Solar could eventually have among the highest efficiencies in the industry. The efficiency gains will allow the company to reduce per-watt manufacturing costs, while allowing it to improve manufacturing capacity incrementally without additional capital investments. Additionally, Cd-Te panels also have an edge over silicon-based panels when it comes to total energy yield, since they perform well under a variety of lighting and weather conditions.

International Bookings, Which Have Traditionally Been A Weak Spot, Are Improving

While First Solar’s overall booking performance is down compared to last year, amid slower U.S. contracting activity, the company is beefing up its presence in international markets. Although First Solar missed out on the growth spurts in China (where local firms dominate the market) and Japan (where very high-efficiency silicon panels are prized), the company looks well poised to capitalize on the next wave of solar growth from markets such as India and the Middle East, given the suitability of its technology. India, for instance, aims to drive solar installations to 100 GW by 2022 from under 10 GW currently. During Q2, First Solar won projects with a capacity of about 280 MWdc in India and 130 MW from Thailand, Israel, France and  Zambia. Roughly 60% of the firm’s potential booking opportunities now also come from overseas.

Strong Financials Conservative Valuation Metrics

First Solar’s financial position remains the strongest by far in the industry, with $1.65 billion in cash and marketable securities and over $400 million in restricted cash. This should allow it to manage operating commitments through 2017, when demand and cash flows could see a lull. Moreover, the company’s debt load is also low, standing at roughly $230 million. First Solar’s valuation multiples are also attractive, with the stock trading well below book value (P/B ratio of 0.7 as of Q2) and about 9x projected 2016 earnings. The P/E falls to under 5x if we exclude its net cash position. This is well below the MAC Global Solar Energy Index, which has a P/E of over 7x.

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