First Solar (NASDAQ: FSLR)
is sitting right around 2020 highs after an early July surge sent shares up 20% in less than two weeks.
There’s a lot going on in the solar industry.
On the one hand, the industry is projected to see huge growth well into the 2020s – and likely beyond. First Solar is an industry leader that trades at around 21x projected 2020 earnings and 16x projected 2021 earnings.
However, the commodification of its offerings has put serious pressure on First Solar’s gross margins – they have more than halved over the past decade. Margins will have to stabilize in the long run for First Solar stock to prosper.
But First Solar has managed to increase volumes in a high-growth industry, mitigating the effects of the margin contraction.
A Booming Industry Set for Continued Growth
According to alliedmarketresearch.com, the global photovoltaic market was valued at around $54 billion in 2018 and is projected to grow to over $333 billion by 2026. That equates to a CAGR of around 25% from 2019 to 2026.
The solar industry is hot – no pun intended – and First Solar is one of the most profitable businesses in an industry where many competitors have struggled to consistently turn a solid profit.
First Solar more than doubled shipments of PV modules in 2019 to 5.5 Gigawatts (GW) ranking 8th on the world’s top PV producers list.
First Solar Gross Margins Are Under Pressure, Operating Margins Are Solid
As touched on earlier, First Solar’s margins have more than halved over the past decade and now sit at a little over 20%. And while increased volume has helped to blunt the impact, revenue is still roughly flat over the past three-year, five-year, and ten-year timeframes.
EBIT has grown at a CAGR of a little over 5% over the past five years, showing First Solar’s operational chops.
Pandemic Has Created Headwinds in 2020
The pandemic has provided headwinds for business and projected earnings for full-year 2020 currently stand at an average of a little under $3 a share – with a wide range of potential outcomes around that number. In the Q4 2019 earnings call, First Solar estimated 2020 earnings of $3.25 to $3.75 per share. If we take the middle of that range, 2020 earnings projections are now 20% lower – mostly due to the virus.
First Solar has had to adjust its manufacturing according to government mandates in its facilities in the United States, Malaysia, and Vietnam. The company was exempted from shutdowns as an essential business in all three countries, but production was still cut, and safety-related costs were incurred.
But FSLR has thus far weathered the storm and pandemic-related headwinds should dissipate in the coming quarters.
Furthermore, the company’s net cash position of $1.1 billion which includes cash, restricted cash, and marketable securities less debt, should sufficiently cushion the company from any short-term obstacles.
Are First Solar Shares a Good Value?
With shares trading at around 16x 2021 projected earnings, First Solar will trade at a very reasonable valuation once the economy fully recovers from the pandemic.
The gross margin deterioration is not what you want to see – particularly from a company in a rapidly growing industry – but First Solar was actually expecting gross margins to improve to 26-27% in 2020 before the pandemic started. If gross margins can stabilize in the mid-20s, and First Solar can grab its share of the high-growth solar industry, the company can see some nice growth over the next five to six years, and potentially look like a bargain at current levels.
First Solar - Where Can You Get In?
After shooting above $60 a share by mid-July, First Solar has spent the past two weeks in a tight range between around $60 and $63.50. Volume has been light, showing that investors are largely holding onto their positions – waiting for First Solar to digest its recent gains. FSLR looks to be putting in the foundation for another leg-up, with the recent 50-day moving average cross over the 200-day moving average representing another technical tailwind.
Ideally, shares would consolidate for another week or so between $60 and $63.50, culminating in a decisive breakout above $64. With Q2 earnings set to be released on Thursday, August 6, you should keep an eye on FSLR; if it reports strong numbers with improving margins, you may want to buy the news.
The Final Word on First Solar
Profitable companies in rapidly expanding industries usually trade at huge multiples. In the case of FSLR, there is no justification for a 50-100x multiple – like what you see with many high-flying tech stocks.
There are legitimate concerns around First Solar’s margins and the commodification of its offerings. But shares have more than priced in these concerns and now represent a good risk/reward.
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