First Solar differentiates itself from other major solar companies by producing thin-film solar panels, while the other major companies manufacture silicon solar panels. At the same time, we can expect a significant increase in investment in renewable energy in the future. Does this mean that First Solar is an interesting investment opportunity?
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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 stocks I 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. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
First Solar is an American manufacturer of thin-film solar panels and a provider of utility-scale PV power plants. While they are based in the United States, they also have factories in Malaysia, Vietnam, and India. First Solar stands out from most other major solar companies because they specialize in manufacturing thin-film solar panels. There are four different technologies used to produce thin-film solar panels, and First Solar utilizes Cadmium Telluride. Most other major solar companies manufacture silicon panels. I don't want to delve into the specifics of their differences, but currently, thin-film solar panels account for 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 perspective, thin-film solar panels have lower carbon and water footprints compared to silicon panels. First Solar, in addition, recycles more than 90% of the materials from old panels. There are many aspects to appreciate about the technology utilized by First Solar. First Solar is the world's largest thin-film PV solar module manufacturer and the largest PV solar module manufacturer in the Western Hemisphere. The company has been in business for 25 years. Thus, I believe that First Solar has established a moat through its brand.
The 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 assumed the role of CEO. Prior to joining First Solar, Mark Widmar served as the Chief Financial Officer of GrafTech International Ltd., a prominent global manufacturer of advanced carbon and graphite materials. Prior to joining GrafTech, Mark Widmar served as the Corporate Controller and a Business Unit Chief Financial Officer for NCR. He has also served as a Division Controller at Dell, Inc. Mark Widmar has also held various financial and managerial positions with Lucent Technologies Inc., Allied Signal, Inc., and Bristol Myers/Squibb, Inc. He began his career in 1987 as an accountant with Ernst & Young. 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 about Mark Widmar, I have gleaned a few insights from reading letters to shareholders and earnings call transcripts. One thing to note is that he is highly focused on maintaining cost competitiveness, which is one of the reasons why customers opt for silicon solar panels. Another point to note is that he is very vocal about the purported forced labor in the polysilicon sector. This indicates that he takes pride in his vertically integrated manufacturing process, which enhances supply chain transparency and control over the 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.
I believe that First Solar has developed a moat through its brand. I don't have much information about the management, but as mentioned above, I do appreciate some of the things they have done and their emphasis on cost competitiveness. Now, let's analyze the numbers to determine if First Solar meets our criteria for possessing a competitive advantage. In case you want an explanation of what the numbers represent, you can refer to "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 review a 10-year history, with all figures exceeding 10% for each year. 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 had four years with a negative ROIC. First Solar delivered a positive Return on Invested Capital (ROIC) in 2020 and 2021, indicating a positive trend. However, Return on Invested Capital (ROIC) turned negative in 2022, which was a challenging year for most companies, particularly those operating in the renewable energy sector. First Solar delivered a positive Return on Invested Capital (ROIC) above 10% in 2023, which is encouraging as it is the most recent figure. Hopefully, the trend from 2023 will continue moving forward, and First Solar will continue to deliver a positive Return on Invested Capital (ROIC) above 10%.
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 actual numbers and the year-over-year percentage growth. First Solar has maintained relatively stable equity from 2014 to 2022, experiencing increases in some years and decreases in others. However, First Solar not only managed to deliver its highest equity ever in 2023 but also achieved the highest year-over-year increase in the past ten years, which is very encouraging.
Finally, we will analyze 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. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. First Solar has only managed to achieve a positive free cash flow in two years over the past decade, which is discouraging. Furthermore, the negative free cash flow in 2023 was the second lowest figure in the past decade. One explanation could be that First Solar invested heavily in new facilities in 2023, which has affected the numbers. Levered free cash flow margin is negative in most years, and it was also at its second lowest point in 2023. However, I find it encouraging that the last time the levered free cash flow margin was positive, it was 28,1%, which is relatively high. Free cash flow yield is also negative in most years, which doesn't provide much insight into valuation. However, valuation is a topic we will revisit later in the analysis.
Another important aspect to investigate is the level of debt, specifically whether a business has 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. Upon calculating First Solar's financials, I have determined that the company holds 0,56 years' worth of earnings in debt. It is very encouraging to see that First Solar has almost no debt.
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Like all other companies, First Solar also faces certain risks. One significant risk is higher interest rates. High interest rates are particularly detrimental to solar companies, as aptly described by the Motley Fool: "In solar projects, there is a significant initial cost that usually necessitates debt financing, followed by modest revenue streams over the next 20 years or longer." At the end of the installation's useful life, the solar panels no longer have value. Rising interest rates cause the value of long-term cash flows to decrease because investors use a higher discount rate to evaluate them. Higher interest rates could potentially decrease the number of solar projects that secure financing or make it challenging for First Solar's customers to obtain the necessary funding to develop, construct, purchase, or install a PV solar power system on favorable terms, or even altogether. This situation could lead to a decrease in demand for First Solar's solar modules, potentially limiting their growth or reducing their net sales. Global oversupply. Management has mentioned that the continuation of Chinese subsidization and dumping practices has caused a significant collapse in cell and module pricing. Meyer Burger, a European module and cell manufacturer, announced that deteriorating market conditions in Europe have led them to prepare for shutting down module assembly in Germany. In India, a sudden and significant reduction in cell pricing in the non-domestic content market segment has weakened the effectiveness of the country's measures to tackle Chinese supply chain imports, leading to distorted market pricing in the country. In the U.S., the ongoing record level of cell and module imports from Southeast Asia poses a threat to the expansion and establishment of a strong domestic solar manufacturing base. Thus, the current and forecasted oversupply of solar panels could impact the performance of First Solar. One last risk is if governments reduce or eliminate subsidies and economic incentives for solar energy. First Solar has mentioned that in certain markets, their net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives. Federal, state, and local governmental bodies in many countries have provided subsidies in the form of feed-in-tariff structures, rebates, tax incentives, and other benefits to end users, distributors, system integrators, and manufacturers of PV solar products. Many of these support programs expire, phase down over time, require renewal by the applicable authority, or may be amended. While most governments are determined to transition to green energy, reductions and eliminations of subsidies have occurred before, such as during the financial crisis in 2008.
There are also various reasons to invest in First Solar. First Solar is expanding. In 2023, First Solar expanded its manufacturing capacity at its latest announced facility in Louisiana, producing and shipping a record volume of modules. The company also increased its investment in research and development to continue evolving its technology and product roadmap. First Solar produced a record 12,1 gigawatts in 2023, representing a 33% increase in production over 2022. In 2023, First Solar announced a $1,1 billion investment in a new manufacturing facility in Louisiana, which is expected to add 3,5 gigawatts to its capacity by 2026. When combined with their Alabama facility and Ohio manufacturing expansions, both of which are in progress, First Solar expects a 2026 year-end capacity of approximately 14 gigawatts domestically, with another 11 gigawatts internationally, for a global capacity of approximately 25 gigawatts. This is significantly higher than its 16,6 gigawatt capacity in 2023. Thus, First Solar can take advantage of the growth in the global thin-film solar cell market, which is expected to grow at a 19,4% compound annual growth rate (CAGR) until 2030. A large backlog. In 2023, First Solar expanded its contracted backlog to historic levels. As of year-end 2022, First Solar's contracted backlog totaled 61,4 gigawatts with an aggregate value of 17,7 billion or approximately $28,8 per watt. Through year-end 2023, First Solar entered into an additional 28,3 gigawatts of contracts with an average aggregate value of $30,5 per watt. First Solar began 2024 with a total contracted backlog of 78,3 gigawatts with an aggregate value of 23,3 billion or $29,8 per watt. Since the end of 2023, First Solar has further increased its backlog. And these bookings in 2024 have an average aggregate value of $31,9 per watt. Thus, not only is the backlog growing, but so is the value per watt. The Inflation Reduction Act. The Inflation Reduction Act has contributed and is expected to continue to contribute to First Solar's growth. It provides tax incentives to solar module manufacturers, project developers, and project owners to accelerate the ongoing transition to clean energy. This could have a significant impact on First Solar. Management mentioned that they believe they are entitled to a $0,04 tax credit per watt sold and a $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. Management also mentioned that the Inflation Reduction Act partly contributed to First Solar's gross profit margin being 39% in 2023, compared to 5% in 2022.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 7,74, which is from the year 2023. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 37% in the next five years, but 15% is the highest number I use. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on First Solar's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $232,20. 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 $116,10 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: (Operating cash flow - maintenance capital expenditures + tax provision) / shares outstanding x 10. However, First Solar's capital expenditures exceeded the sum of operating cash flow and tax provision. Capital expenditures were high due to manufacturing capacity expansions in Alabama, Ohio, Louisiana, and India. However, I have not been able to determine the amount allocated to maintenance capital expenditures. Therefore, I am unable to make this calculation.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. However, as First Solar had a negative free cash flow in 2023, I am unable to make this calculation.
I believe that First Solar is an interesting company with good management. Like all other companies in the solar sector, First Solar is facing challenges due to higher interest rates. It means that it is difficult for First Solar's customers to secure the financing necessary to develop, build, purchase, or install a photovoltaic (PV) solar power system on favorable terms. The continuation of Chinese subsidization and dumping practices has caused a significant collapse in cell and module pricing. It has had an effect in both Europe and India, where domestic producers are experiencing difficulties competing with Chinese cells and modules. The U.S. is more protected because Chinese solar companies cannot export directly to the United States; instead, exports go through other Southeast Asian countries. If the lower pricing continues, it could affect First Solar, as customers may choose an alternative to their products. First Solar relies on government subsidies and economic incentives. Although there is currently no indication that these supports will be discontinued in the near future, such changes have occurred in the past. Nonetheless, First Solar is expanding and increasing its capacity, which should benefit the company once interest rates decrease, as the global thin-film solar cell market is expected to experience high growth until 2030. First Solar's backlog is also at a record high, and the company has managed to increase the average aggregate value per watt, which is a great sign. Finally, First Solar, America's largest PV solar module manufacturer, will greatly benefit from the Inflation Reduction Act. I already own shares in one of First Solar's competitors, and I am not interested in increasing my exposure to the solar industry. However, if I didn't already have exposure, I would probably buy shares in First Solar below the Margin of Safety price at $116.
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