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The Hottest Solar Stock On The Block

Solar

I have, on many occasions here, recommended First Solar (FSLR) as a buy, and yesterday’s earnings release confirmed that view once again. For the second quarter in a row they didn’t just beat street expectations, they shattered them, reporting EPS of $1.95 versus a consensus forecast of $0.84 fueled by sixty percent year-on-year revenue growth. If you took my advice and are long the stock, that is obviously good news, but what should really get you excited is the story behind those blowout results.

The base case for owning solar power stocks in general is well documented, but worth repeating. Even the most die-hard traditional energy investor should by now recognize one thing; alternative energy, and solar power in particular, is neither a fad nor at an inherent cost disadvantage. Solar arrays are producing a growing amount of consistent, cheap electricity all over the world, and will continue to do so whatever politicians may say. Here in the U.S. we have about as pro-fossil fuel an administration as one can imagine in DC, but on a state and local level, alternatives dominate.

That doesn’t mean, however, that every solar stock is a buy. Solar power may not be at a noticeable cost disadvantage any more, but it was for many years. That, combined with a massive, heavily subsidized ramping up of solar panel production in China, left many companies in the industry struggling and weighed down with debt. FSLR, however, is different. They have just over $2.2 billion of cash on hand, but only carry just over $432 million of debt and a whopping Current Ratio of 6.82.

(Click to enlarge)

Long-term viability is obviously not an issue for First Solar and as the industry continue to grow they will benefit. What should really get investors excited, though, is something more company specific and near-term in nature. The last couple of quarters’ spectacular results have been achieved as the company effects a transition in their product, phasing out the old Series 4 Module technology and shifting to Series 6.

Normally, a change like that can, in any business, be expected to have one of two effects. Either customers rush to buy the older, cheaper technology, or they defer purchases until the newer products are released. Continued strength in Series 4 sales from FSLR after Series 6 was announced suggested that in this case it was the former, but it seems that FSLR have managed to achieve the latter as well, as on yesterday’s conference call management said that they had bookings for Series 6 through 2020.

The history thus far of the solar power industry is littered with companies that have been hailed as the next big thing, then failed completely, as even the most ardent supporter of alternative energy must admit. That industry volatility and the huge jump in FSLR after the report may convince you that the stock is not worth buying at this point, and I, as a contrarian by nature and training, can see where that might come from.

In this case, however, the contrarian stance is wrong. Times have changed, and First Solar is a company that has gone through that volatility and emerged as a financially stable, successful company, with a knack for creating products that customers want to buy. That makes the stock a good investment, even at these levels.




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