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First Solar: A different solar panel company.

Opdateret: 24. feb.


First Solar differentiates itself from other major solar companies by producing thin film solar panels, whereas the other major companies manufacture silicon solar panels. At the same time, we can expect a significant increase in investment in renewable energy moving forward. Does this mean that First Solar is an interesting investment opportunity?


This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.


For full disclosure, I should mention that at the time of writing this, I do not own any shares in First Solar. I do, however,own shares in one of their competitors, Canadian Solar. If you are interested in copying my portfolio or viewing the stocksI own, you can find instructions on how to do so here. I should also mention that I am by no means an expert when it comes to solar panels. I have conducted extensive research on various companies, which has given me the confidence to invest in Canadian Solar. Hence, this analysis will not be excessively technical. If you want to buy shares or fractional shares in either Canadian Solar or First Solar, you can do so through eToro. It is very user-friendly and easy to get started, and you start with as little as $50.



First Solar is an American manufacturer of thin film solar panels and a provider of utility-scale PV power plants. Whilethey are based in the United States, they also have factories in Malaysia and Vietnam They are currently building a factory in India. What differentiates First Solar from most other major solar companies is that they manufacture thin film solar panels. There are four different technologies to produce thin film solar panels, and First Solar uses Cadmium Telluride. Most other major solar companies manufacture silicon panels. I don't want to go into details about how they differ from each other, but currently, thin film solar panels make up only about 5% of the global solar market. These two technologies have distinct advantages and disadvantages. The advantages of thin film solar panels are that they require fewer materials, are well-suited for flexible panels, and perform better in hot temperatures, humid environments, and partial shading than silicon panels. However, silicon panels have historically had higher efficiencies than thin film solar panels, which means that silicon panels are cheaper when you compare the cost to the output. From an environmental standpoint, thin film solar panels have lower carbon and water footprints compared to silicon panels. First Solar, in addition to that, also recycles more than 90% of the materials from old panels. There are many things to like about the technology that First Solar uses, but I haven't been able to determine a moat for the time being. It doesn't mean I don't like the company, but investing in First Solar carries more risk if they don't have a strong competitive advantage.

Their CEO is Mark Widmar. He became the CEO in 2016 but had been at First Solar since 2011, where he worked as CFO until he became CEO. He has a Bachelor of Science in Business Accounting and a Master of Business Administration from Indiana University. While there is not much information available online regarding Mark Widmar, I have noted a few things when reading through letters to shareholders and earnings call transcripts. One thing is that he is very focused on being cost competitive, which is one of the reasons customers choose silicon solar panels. Another thing is that he is very outspoken about the alleged forced labor in the polysilicon sector. This indicates that he takes pride in their vertically integrated manufacturing process, which improves their supply chain transparency and control over their end-to-end manufacturing process. I personally also liked that he decided to sell their operations and maintenance business in North America, as I believe their resources are better used elsewhere.

First Solar currently does not have a moat. However, this does not mean that they cannot develop one in the future. As ofnow, I do not believe they have a moat. I cannot find much information about the management. However, as mentioned above, I do appreciate some of the things they have done and their emphasis on cost competitiveness. Nevertheless, let us investigate the numbers to see how First Solar has performed historically. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.


The first number we will look into is the return on invested capital, also known as ROIC. We want to see 10 years of history, and we want the numbers to be above 10% in all years. The numbers are underwhelming, as First Solar has only delivered a return on invested capital (ROIC) above 10% once in the last 10 years and has even had years with a negative ROIC. First Solar had a period of positive ROIC (Return on Invested Capital) in both 2020 and 2021, indicating a positive trend. Unfortunately, a challenging year in 2022 resulted in another year with a negative ROIC.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actualnumbers and the percentage growth year over year. It appears that the equity of First Solar has remained relatively stablesince 2015. However, it is positive to see that 2021 and 2022 have been the two best years for First Solar. Hopefully, the trend continues.



Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Once again, the numbers that First Solar delivers are underwhelming. A negative free cash flow was observed in the last 5 years and in 7 out of 10 years overall. A few years of negative free cash flow is not necessarily discouraging for me when considering investing in a company, but I would prefer to see better financial figures than these.



Another important aspect to investigate is the level of debt, specifically whether a business has a manageable debt that can be paid off within a period of 3 years. We do this by dividing the total long-term debt by earnings. Doing the calculation on First Solar, I can see that First Solar has 0,5 years' earnings in debt. It is very encouraging to see that First Solar has almost no debt.



Like all other companies, First Solar also has some risks. One significant risk is higher interest rates, which is welldescribed by the Motley Fool: "In solar projects, there is a large upfront cost that typically requires debt financing, andthen there are small revenue streams over the next 20 years or more. At the end of the installation's useful life, the solarpanels no longer have value. So rising interest rates make the value of those long-term cash flows lower because the discount rate investors use to value them is higher." Another high risk is the volatility of commodity prices and freight costs, which experienced a significant surge in 2022. In their latest earnings call, management spent a significant amount of time discussing the persistently high commodity prices and freight costs, which remain elevated compared to their historical levels. Management mentioned that they do not expect prices to change in the short term, which will put pressure on margins. Additionally, gross profit margins decreased by 11 percentage points. Hence, when prices are high, it will hurt profits. One last risk is if governments reduce or eliminate subsidies and economic incentives for solar energy. It may not be something you consider happening, as most governments seem to be very involved in transitioning into green energy. However, it did happen during the financial crisis in 2008, and if we see another financial crisis, it might be something to look out for.


There are also some potential opportunities for First Solar moving forward. One thing that could potentially make First Solar a good investment is the projected growth of the solar energy sector. A report by Allied Market Research predictsthat the solar energy market will reach a value of $223,3 billion in 2026, which means a compound annual growth rate of 20,5%. Additionally, Global Market Insights forecasts that the thin film solar cells market, specifically in the sector of First Solar, will experience a compound annual growth rate of 16% until 2024. These are interesting numbers, and they show how much growth potential there is for First Solar. Better margins. The management has a plan to increase margins and expects to see a gross profit margin above 20% again in 2024. There are various methods through which management can enhance profit margins. Commodity prices and freight costs will not continue to be as high as they are now. The cost per watt production is expected to decrease by 4% to 6% annually as technology improves. Additionally, their Indian factory is expected to generate higher margins due to lower labor costs. The Inflation Reduction Act. If the Inflation Reduction Act is approved in its current form, it could be a significant winfor First Solar. Management mentioned that they believe they are entitled to $0,04 tax credit per watt sold and $0,07 tax credit per module, combined with a $12 wafer provision per square meter. These numbers may not seem significant as you read them here, but some analysts believe that they could increase annual earnings per share to $8 to $10. It was $4,40 in 2021. Hence, the Inflation Reduction Act could be a significant win for First Solar.



All right, we have gone through the numbers, potential, and risk regarding Microsoft, and now it is time for us to calculate a price for Microsoft. To calculate the price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website. I don't want to go through the entire calculation here. I chose an estimated future EPS growth rate of 15% (even though the solar energy market is expected to grow by 20,5%,15% is the highest rate I use). I also selected an estimated future PE of 30 (which is double the growth rate), and we already have the minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $132. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy First Solar at a price of $66,00 (or lower, obviously) if we use the Margin of Safety price.


Our second method for calculating a purchase price is the Ten Cap price, which is also explained in "MY STRATEGY".To do so, we need some numbers from their financials. Keep in mind that all numbers are in millions. The operating cash flow last year was 874. The capital expenditures were 904. I tried to look through their annual report to see how much of the capital expenditures were used for maintenance. I couldn't find it, but as a general guideline, you can expect 70% of the capital expenditures to be allocated for maintenance. This means that we will use 633 for in our calculations. The tax provision was 58. We have 106,609 outstanding shares. Hence, the calculation will be as follows:(874 - 633 + 58) / 106,609 x 10 = $28,05 in Ten Cap price.


The final calculation is the Payback Time. I also described in "MY STRATEGY". But since First Solar's Free Cash Flow Per Share has been negative since 2017, I am unable to make the calculation.


First Solar is an interesting company because they utilize a different technology compared to most other major solar panel companies. Personally, I am somewhat discouraged by their historical performance and lack of competitive advantage.Higher interest rates are not good for companies like First Solar either, and with inflationis still high, we could see more increases. However, I like that management has a clear plan on how to improve margins moving forward. I will need to see that management can execute on this though. The Inflation Reduction Act could be a significant catalyst for First Solar, and many analysts believe that First Solar will be the biggest beneficiary among all companies if it is approved in its current form. I still prefer Canadian Solar over First Solar, and I would likely increase my investment in Canadian Solar rather than adding First Solar to my portfolio. Thus, I will not be adding First Solar at this point, even if it can be bought at the Margin of Safety price of $66,00.


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