First Solar: A different solar panel company.
Opdateret: 22. apr.
First Solar differentiate from other major solar companies, as they make thin film solar panels, while the other major companies make silicon solar panels. At the same time, we can expect a lot of investment in renewable energy moving forward. Do these things mean that First Solar is 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.
For full disclosure, I should mention that at the time of this writing, I do not own shares in First Solar. I do however own shares in one of their competitors Canadian Solar. If you want to copy my portfolio or see what shares I own, you can read how to do so here. I should also mention that I'm by no means an expert when it comes to solar panels. I have done some research on the different companies, which made me confident enough to invest in Canadian Solar. Hence, this analysis will not be overly technical.
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. They are also currently building a factory 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 make 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 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 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 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 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 don't think they have 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 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 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 years. The numbers are underwhelming, as First Solar has only delivered a ROIC above 10 % once in the last 10 years and even have years with a negative ROIC. First Solar has a period of positive ROIC in 2020 and 2021, which is positive. Unfortunately, a challenging year in 2022 resulted in another year with a negative ROIC.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. It seems like the equity of First Solar has been relatively flat since 2015. However, it is positive to see that 2021 and 2022 has been the two best years for First Solar. Hopefully the trend continues.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. Once again, the numbers that First Solar delivers are underwhelming. A negative free cash flow in the last 5 years and in 7 years out of 10 in total. A few years of negative free cash flow is not necessarily something that discourages me for investing in a company, but I would like to see better numbers than these.
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 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 almost have no debt.
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 surged in 2022. In their latest conference call, management took a lot of time talking about how commodity prices and freight costs and how both continue to be elevated compared to their historical prices. Management mentioned that they do not expect prices to change in the short-term, which will put pressure on margins, and gross profit margins decreased 11 percentage points. Hence, when prices are elevated, 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 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.
There are also some potentials for First Solar moving forward. One thing that could potentially make First Solar a good investment is that the solar energy sector will grow. 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 interesting numbers, and they show how much growth potential there are for First Solar. Better margins. The management has a plan to increase margins and expects to see a gross profit margin above the 20 % again in 2024. There are different ways that management will improve margins. Commodity prices and freights costs won't continue to be as high as they are now, a reduction in cost per watt produces between 4 % to 6 % a year as technology improves, and their Indian factory should deliver 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 huge win for First Solar. Management mentioned that they believe they are entitled to $0,04 tax credit per watt sell and $0,07 tax credit per module combined with $12 wafer provision per square meter. These numbers may not mean a big deal as you read them here, but some analysts believes that it could lift annual earnings per share to $8 to $10. It was $4,40 in 2021. Hence, the Inflation Reduction Act could be a huge win for First Solar.
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. 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 an EPS at 4,40, which is the one from 2021 (EPS was negative in 2022). 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 $132 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 $66,00 (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 some numbers from their financial statements, keep in mind that all numbers are in millions. The Operating Cash Flow last year was 874. The Capital Expenditures was 904. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 633 in our further calculations. The Tax Provision was 58. We have 106,609 outstanding shares. Hence, the calculation will be like this: (874 - 633 + 58) / 106,609 x 10 = $28,05 in TEN CAP price.
The last calculation is the PAYBACK time. I also described in "MY STRATEGY". But with the Free Cash Flow Per Share being negative since 2017, I can't make the calculation.
First Solar is an interesting company as they use another technology in most other major solar panel companies. Personally, I'm a little discouraged about their historical numbers and lack of moat. Higher interest rates are not good for companies like First Solar either, and as inflation is surging, 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 huge catalyst for First Solar, and many analysts believes that First Solar will be the biggest beneficiary of all companies, if it is approved in its current form. I still like Canadian Solar better than First Solar, and I would probably increase my position in Canadian Solar instead of adding First Solar to the 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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