Is First Solar an overlooked investment?
Opdateret: 3. maj
First Solar differentiate from other major solar companies, as they make thin film solar panels, while the other major companies make silicon solar panels. Could this lead to an interesting investment case?
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.
Before starting this analysis, I should mention that I'm by no means an expert when it comes to solar panels. I have done some research on the different companies, and I felt confident enough to invest in Canadian Solar, as you can read about here. Nevertheless, a copier of mine asked me to investigate First Solar. Previously, I have looked into the numbers but didn't have an in depth look at the company. I have been reading up on the company and would like to share my thoughts and calculations in this post. However, I do encourage you to do your own research on the company.
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 have factories in Malaysia, Vietnam, and USA, while they are also building one in India. What differentiate First Solar from most other major solar companies is that they make thin film solar panels (there are four different technologies to do so, and the one First Solar use is Cadmium Telluride). Most other major solar companies made silicon panels. I don't want to go into details about how they differ from each other but as it looks now, thin film solar panels are only about 5 % of the global solar market. These different technologies have different advantages and disadvantages. The advantages of thin film solar panels are that they need fewer materials, it is well-suited for flexible panels, while they also perform better in hot temperatures, in humid environments and partial shading than silicon panels. However, silicon panels have historically had higher efficiencies than thin film solar panels, meaning it makes silicon panels cheaper when you compare cost to output. From an environmental point of view, thin film solar panels have lower carbon and water footprints than silicon panels. Adding to that First Solar, also recycle more than 90 % of the materials from old panels. There are many things to like about the technology First Solar, 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 an investment in First Solar is riskier if they don't have a strong moat.
Their CEO is Mark Widmar. He became the CEO in 2016 but have been at First Solar and worked as CFO until he became CEO. He has a Bachelor of Science in business accounting and a Masters of Business Administration from Indiana University. While there is not much information regarding Mark Widmar available online, there are some things I have noted when reading through letters to shareholders and conference call transcripts. One thing is that he is very focused on being cost competitive, which is one of the reasons customers will choose silicon solar panels. Another thing is that he is very outspoken about the alleged forced labor in the polysilicon sector, which means he is very proud of their vertically integrated manufacturing process, which enhances their supply chain transparency and control of their end-to-end manufacturing process. I personally also liked they he decided to sell their operations and maintenance business in North America, as I believe their resources are better used elsewhere.
First Solar doesn't currently have a moat, it doesn't mean they cannot develop one down the line but as it looks now, I cannot find a moat. I cannot find much about the management, but as mentioned above, I do like some of the things they have done, and how their focus is on being cost competitive. Nevertheless, let us investigate the big five numbers to see, how First Solar has performed historically. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. The numbers are underwhelming, as First Solar doesn't fulfill the requirements in any of the benchmarks. The only slightly positive thing is that the last year benchmark looks much better, and hopefully it means that it is a new trend and First Solar will start delivering an acceptable ROIC.
The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. Once again, the numbers disappoint, as First Solar doesn't manage to fulfill the requirements in any of the benchmarks.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. All right, in the latest benchmarks First Solar delivers tremendous numbers, and while you cannot expect seeing these high numbers moving forward, it is certainly nice to see this amount of growth. The older benchmarks leave a lot to desire.
The Equity Growth Rate is the most important of the growth rates. Once again, the numbers are generally underwhelming. The latest benchmark is encouraging and if you are considering investing in First Solar, you must hope that the trend continues.
Finally, we investigate the Cash Growth Rates. It isn't the most important of the growth rates, but it is a bit concerning to see numbers like these in four benchmarks. You still need to look at the company overall and a bad cash growth rate shouldn't keep you from investing in a company, but it is obviously something you would need to monitor.
I usually do a summation of the numbers. However, in general all the historical numbers of First Solar are in a range of underwhelming to disastrous. In some of the growth rates and in the ROIC, you do see signs of improvement in the later benchmarks. If you are going to invest in First Solar, you will first and foremost need to be convinced that the improvement will continue, and then you will need to monitor the numbers going forward.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on First Solar, I can see that First Solar has 0,60 years earnings in debt, which is obviously very encouraging.
Most of the numbers have been underwhelming. However, one reason why you might still be interested in the company is that you should remember that the numbers are historical, and don't always reflect the future. It is to be believed that the solar energy market will perform much better soon than it has done in the past. A report made by the Allied Market Research believes that the solar energy market will reach a value of $223,3 billion in 2026, which would be a compound annual growth rate of 20,5 %. And looking more specifically to the sector of First Solar, according to Global Market Insights, the thin film solar cells market is expected to grow at a compound annual growth rate of 16 % until 2024. These are obviously very interesting numbers. Furthermore, First Solar might be able to develop some sort of moat, if the United States continue to uphold their Solar Tariffs on imported goods, as it would make foreign products more expensive.
Like all other companies, First Solar has some risks as well. One large risk is higher interest rates, and the risk is very well described by the Motley Fool: "In Solar projects there is a large upfront cost that typically requires debt financing, and then there are small revenue streams over the next 20 years or more. At the end of the installation's useful life, the solar panels 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 commodities prices and freight costs, which have both been surging in 2021. Especially freight cost has hurt First Solar, and in their Q2 conference call, they said "that freight costs will have an adverse impact on our financial results in 2021", they also mentioned that the price for spot routes between Asia and U.S. have increased by 200% to 300% in 2021. 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 seems 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.
All right, we have gone through the numbers, potential and risk regarding First Solar, and now it is time for us to calculate a price for First Solar. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use a EPS at 3.75, which is the one from 2020. I chose a Estimated future EPS growth rate of 15 (even though the solar energy market is expected to grow with 20,5 %, 15 % is the highest I use), Estimated future PE 30 (which the double of the growth rate) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $112,50 and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy First Solar at price of $56,25 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need an Operating Cash Flow plus Tax Provision that is higher than the capital expenditures. However, First Solar haven't had that since 2017, and I don't think it makes sense to make calculations now based on numbers from 2017. Hence, it is not possible to calculate a Ten Cap price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 0,52 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $8,21.
First Solar is a strange case. I personally see a lot of potential growth in thin film solar panels sector, especially if they can become cost competitive. At the same time, they currently have a large competitive advantage in the United States due to the solar tariffs, and while Canada has filed a complaint to CUSMA, the tariff is still withheld. However, I'm a bit concerned regarding the lack of moat and the historical numbers. I would consider opening a small speculative position if the price fell to the Margin of Safety price of $56,25.
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