I Bought Some First Solar (FSLR) Today!

Good day!  First Solar (Ticker: FSLR) seems to be finding a nice support around the $120-125 area.  I bought some more shares today as I continue to take this as a great buying opportunity.  I also recently started a naked put option on First Solar.  See my trade history.

So what happens if it continues to fall?  I'm buying more!  Overall, Q1 has not been a nice quarter to a number of solar companies.  Evergreen Solar (Ticker: ESLR) is on the brink of bankruptcy.  So, the fallout is beginning! This is a good thing!  Why?  As I have said before, the smaller players will die out, leaving the field for a handful of larger players, such as First Solar.  We know the solar sector will flourish in the current and next decade.  Having stake in the best company in the industry will help you ride the wave.

Also of note, Sunpower (Ticker: SPWR) is being bought out by Total.  This means well for the industry in general.  If an oil company is investing in clean energy, you know it's got a future!  Who knows, maybe some other company like Exxon or BP would be interested in First Solar?  A takeover will send shares very high!

Quick Comparison: First Solar (FSLR) vs. JA Solar (JASO)

JA Solar (Ticker: JASO) impressed investors today with its earnings report and its stock was given a nice 6% jump.  I was a little less impressed.  Here's why.  I am a big fan of huge gross and profit margins.  Why?  Large margins indicate one thing: a huge moat!  People are willing to pay a premium for the product relative to the cost of the product.  Ok, so you say, what's the big deal about profit margins anyway?  A company can still make money and grow revenues/profits even with low margins.  Yes, that is true, but the safety factor for companies with small margins is small.  Let's do a quick comparison.

First Solar 2011 Q1 Results
Revenue: $567 million
Gross Profit: $260 million
Gross Margin: 45.9%
Operating Margin: 20.4%

JA Solar 2011 Q1 Results

Revenue: $556 million

Gross Profit: $96.3 million

Gross Margin: 17.3%

Operating Margin: 15.0%

You can see that both companies made about the same amount of revenue, but the gross profit of First solar was more than double that of JA Solar.  This essentially means that the selling price of JA Solar's products were just a bit above that of its cost.  The one big risk that everyone talks about in the solar industry is falling average selling prices (ASPs).  It means that because many companies are ramping up production, the supply of solar cells/panels will exceed the demand.  As a result, the price of the cells/panels drop.  Because First Solar has a large gross margin, it is more insulated from dropping prices.  If ASPs dropped by 15%, you can bet JA Solar will be losing money.  First Solar may still be able to make money, but just less.

It is a little unfair to do this comparison, however, because First Solar makes panels and JA Solar makes cells.  Solar cells are essentially commodities and are typically a low margin business.  I guess this makes my point even stronger.  First Solar has proprietary technology that lowers its cost significantly.  However we spin it, First Solar's business is superior to that of JA Solar's.

Another interesting point...JA Solar has a very, very low SG&A component, about 2.3% of revenues (gross margin minus operating margin).  The company used only $12.8 million for sales, general, and admin expenses in the quarter, which is suspiciously low.  I'm wondering if there are any accounting tricks that were used.  You can compare this with First Solar's $145 million.  While this is high, it seems much more reasonable.

All in all, it is no surprise that JA Solar's P/E ratio is at a low 4.0.  Investors know this is a risky play.

Volatile Stock: First Solar (FSLR)

First Solar reported earnings earlier this week.  They beat estimates by about 15%, but investors weren't pleased with the outlook, which was the same as their guidance last quarter.  Talk about illogical!  Mr. Market is having big mood swings.  It was less than 3 months ago that the stock hit $175.  Now, it's $128.  This, ladies and gentlemen, is volatility for you!

Take a look at their earnings press release and also earnings call transcript.  I got a sense that Q2 will be another tough quarter, but sailing should be smoother in the second half.  Be prepared for a bumpy ride for the next few months.  On the bright side, some positive outlook they've given include 3.0 GW capacity by end of 2012 and cost per watt down in the $0.52 to $0.63 range by 2014.  This means their capacity would be doubled of what it is today in about 18 months.  In the meantime, I am planning on selling a naked put and maybe also buying some shares (both are bullish positions).