Thursday, September 22, 2011

The Death of (First) Solar?

It's been a dark month for solar...One of my favourite stock just lost a good chunk of its value.  Is this a sign of things to come?  Will solar energy slowly fizzle out?

Let's do a quick re-cap of the happenings in the industry.  With a couple weeks of each other, two US solar panel manufacturers, Evergreen Solar and Solyndra, filed for chapter 11 bankruptcy protection.  The political fallout that ensued included the US Congress putting extreme pressure on the Department of Energy for its $500+ loans to Solyndra.  This puts the loan guarantees that First Solar was looking for in jeopardy.  Word on the street is that it will not get one of the three loans that it was seeking from the DOE.

So, what does the future hold for First Solar?  Or solar in general?  Surprisingly, it is good!  Here are a few reasons.

Traditionally, Europe has been the biggest solar market, with Germany and Italy being top dogs.  With the Eurozone debt problems, they will soon be replaced by the following markets: US, China, and India.  Just look at the comparison.  You have Germany, Italy, Spain, etc....then compare them to US, China, and India.  Even just one of the three nations mentioned can overshadow the entire European market.

Back to First Solar.  So, what happens if it doesn't get the loans from the DOE?  Well, how do other companies get financing?  They sell bonds.  That is exactly what First Solar will do.  True, the cost of borrowing will rise, but the impact is likely just slightly reduced earnings.  At its current price of $73.52, by the end of Q4, the P/E ratio would be 8.0 with the current analysts' estimate of $9.13/share earnings estimate.  Even if FSLR misses by a full dollar, the P/E would a mere 9.0.  The current stock price is absolutely unjustifiable.  By the way, I bought some more shares at $82.50, and will continue to do so.

Going back to Evergreen and Solyndra.  Do take note that the cost per watt of these two companies are greater than $2/watt and $3/watt, respectively.  First Solar is closer to $0.70/watt.  Now, you see why the former two companies went bankrupt.  I have already written about the impending consolidation in the solar industry, with a prediction of Evergreen going belly up coming true *patting myself on the back*!  Look at the days of the automobile.  In the early days of the 20th century, there were hundreds of auto makers in the US.  By the end of the Great Depression, only three survived.  The ensuing years became a time of boom for the Big Three.  I believe that solar energy will be similar.  There are many players now, but we are beginning to see a phase of consolidation.  A few will remain after the dust settles.  My bet is with First Solar.

Do I believe the market is being irrational?  I believe so.  I think the downside risk of buying First Solar now is very minimal.  It was much riskier to have bought the stock at $120, but I still did, because I believed its business was intact.  So, at $73, are you kidding me?  If I were any less responsible, I'd be taking a large chunk of money out of my home equity line of credit!

But, of course, I have to be extra responsible now because our second child, Athanasius, was born just last month, on August 17!  I hope this was a good enough excuse to have put a pause on my blogging!  There's a lot I need to write about, including rolling out an update to my Rule #1 spreadsheet.  I'll do my best to squeeze in some writing time!

Update September 22, 2011 - You would have thought that this guy plagiarized my post!  Great minds think alike! :)