Rising Star Buy: First Solar

This article is part of our Rising Star Portfolio series.

Investors could be forgiven for believing that the sun is setting on solar companies. Highly recognized solar stocks like Solyndra, Evergreen Solar, and Intel (Nasdaq: INTC  ) -backed SpectraWatt have all recently filed for bankruptcy. These high-profile failures have only fueled the investor pessimism surrounding an alternative energy sector that's seen its share of troubling questions in the last year or so.

Given the long shadow over sun-powered energy alternatives, now must be a bad time to buy in, right? Actually, investors' gloom-shrouded outlook presents us with a great opportunity to buy strong solar companies for the long term. Despite the dark sentiment facing this renewable energy sector, I've decided to pick up some shares of industry leader First Solar (Nasdaq: FSLR  ) for my Rising Star portfolio.

The business
Tempe, Ariz.-based First Solar boasts the largest market cap among solar companies. First Solar designs and manufactures low-cost photovoltaic (PV) solar power systems and modules. It's working to reduce solar electricity's price to affordable levels, diminishing the technology's reliance on government subsidies.

In 2010, First Solar produced nearly 1.4 gigawatts of solar modules. The company also boasts that it's the largest thin-film PV solar module manufacturer. Another key differentiator is First Solar's use of cadmium telluride thin film to make its modules, in place of costlier silicon.

Even as clean-tech investments look ever more dubious -- especially when our government's doing the investing -- First Solar has received $5.3 billion in loan guarantees to construct four major solar farms. Better yet, it hasn't had to seek any more loan guarantees for its planned second U.S. factory. The company's gaining a reputation as a strong contender that can stand on its own.

First Solar has also created the first comprehensive module collection and recycling program in the industry. According to its Form 10-K, approximately 90% of each module it collects is recycled into otherwise costly materials for use in new products -- a cost-efficient and environmentally responsible initiative.

Why I'm buying
In January, I bought shares of rival SunPower (Nasdaq: SPWRA  ) for my Rising Star portfolio. I chose SunPower because it looked like the most compelling bargain, and rejected my initial impulse to go for the recognized industry leader, First Solar, which traded at a premium price.

The situation changed rapidly. I sold SunPower in June after French energy giant Total (NYSE: TOT  ) announced its plans to acquire a majority stake. Total's involvement could be a boon; deep-pocketed majority shareholders can definitely benefit up-and-coming companies in nascent industries. However, I also felt that Total's involvement made my investment less certain, and might even hurt SunPower's business one day.

Selling SunPower didn't mean giving up on solar power overall, of course. With First Solar shares now down about 35% since the beginning of 2011, it's currently trading at a mere eight times forward earnings. That same multiple made SunPower look like such a bargain at the beginning of the year. In addition, First Solar's PEG ratio is currently just 0.52.

And now, the risks
Investors' concerns about the solar industry aren't unfounded. Solyndra's bankruptcy has generated even more notoriety (and negativity) because that company received significant financial support from the U.S. government, and even garnered a high-profile visit from President Barack Obama. That aid was not enough to help it succeed.

The market currently believes that Chinese solar companies, bolstered by major support from the Chinese government, are peddling cheap sun-powered wares, leaving American solar companies in the dark and in the red.

Furthermore, solar subsidies won't be as easy to come by as they were in the past, since many of the governments that once handed them out now face serious fiscal issues. Many of First Solar's components customers are in Germany, Italy, France, and Spain -- not ideal sites, given the Eurozone's current financial turmoil. Closer to home, green technology may end up being low on our own government's spending priorities as the economy worsens.

Much like any renewable energy segment, First Solar competes not only with traditional fossil-fuel derived energy, but also other alternatives like wind, hydropower, geothermal, biomass, and tidal technologies.

Foolish bottom line
Many solar companies may fail in the near term, but I believe First Solar's strong enough to survive the industry upheaval. It's always scary when industries consolidate and weaker players fail, but in the long run, it yields more growth for the strongest survivors.

Meanwhile, here's a little sunshine to offset the shadowy uncertainty. The International Energy Agency recently updated its projections about energy generation far into the future, prognosticating that solar energy alternatives could produce most global power within 50 years, with other options like biomass, wind, and so forth supplementing the remainder of energy needs.

This creates a far sunnier outlook, since previous predictions forecast solar options supplying only about 20% of energy needs by 2050.

In other words, picking the winners now as weaker players get winnowed out could pay out major dividends. Every industry cloud has a silver lining, and First Solar's is shining bright.

Alyce Lomax does not own shares of any of the companies mentioned in her personal portfolio. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, First Solar, and Total. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 07, 2011, at 1:12 PM, Brettze wrote:

    Alyce, you know what?? The wealthy living in big mansions are paying top tier prices for electricity , something like 50 cents per kilowatthour or higher.. You see, in your PGE utility bill, you will note that there are several price tiers starting with around 11 cents per KWh for the first 300 KWh you used up for the month and then move up to 23 cents that starts on your 301st KWh until around 600-700KWh. The third tier will charge you well in excess of 30 cents per KWh . I am sure there is fourth, fifth and even sixth tier.. So if you are living in a big mansion , chances are that you are paying through your nose well past the highest tiers every month.. Yet, the wealthy collect tax credits for solar installations on their roofs from the "big government" as the wealthy like to call them... as if the highest tier prices is not enough of an incentive to install their rooftop solar on their own.. This is double dipping so to speak.. Greedy flilthy wealthy pigs!

  • Report this Comment On September 07, 2011, at 3:38 PM, TheDumbMoney wrote:

    1) Call up SolarCity (the largest installer of residential solar in the U.S., as far as I know);

    2) Ask them about what panels they use;

    3) Ask them why the vast, vast majority of people they install for at least on the residential side, at least in the U.S., opt for Korean or Chinese silicon panels.

    (Hint: Cost. Durability)

    First Solar panels are smaller, more expensive, and better looking. In the U.S. they apparently tend to be used primarily in commercial and government applications, whereas the Koreans and Chinese are apparently fairly dominant in residential applications. In fact, the rep I talked to couldn't even remember the last time he/she worked on an installation of First Solar panels on a residential home.

    Best of fortune though....

  • Report this Comment On September 07, 2011, at 6:15 PM, imyoung wrote:

    " Many of First Solar's components customers are in Germany, Italy, France, and Spain -- not ideal sites, given the Eurozone's current financial turmoil."

    Alyce,

    For the last two years I have lived in Germany. I do not think you can lump Germany in with the other countries of the Eurozone for several reasons:

    1) Regardless of the Euro turmoil, Germany has had one of the highest GDP growth rates of the developed nations since the financial meltdown and the highest GDP growth rate of both, the European Union and Eurozone. Their August 2011 growth rate rose to slightly above 4% according to a German TV station.

    2) Germany will phase out their nuclear power plants by 2022 and continue to support renewable energy. Demonstrations against nuclear energy, old reactors and inadequate nuclear waste storage have been going on for years, even before Fukoshima. Chancellor Merkel and her pro-business party had extended the life of many nuclear reactors just about a year before Fukoshima. They did an about face, after antinuclear demonstrations and heavy electoral losses with lots of the votes going to the Green Party. Merkel (she has a Ph.D. in Physics) now supports a nuclear energy phase out and encourages further development of renewable energy. It means, subsidies for renewable energy, including solar, stay in place.

    3) Green energy use in Germany has crossed the 20 per cent mark, a substantial increase over 2010. The government expects a 35% renewable energy production by 2022.

    4) The most dramatic change occurred in the photovoltaic sector, where output almost doubled. According to the German Association of Energy and Water Industries (BDEW), "[b]ecause of the volume of new photovoltaic installations and the amount of sun during the spring, solar energy knocked hydroelectric from third place for the first time." The reasons for the increase in installations were a drop in equipment cost of 50% since 2006 and the German federal governments continued subsidies for private solar-power generation. http://www.spiegel.de/international/0,1518,783314,00.html

    5) FSLR in Germany, recognized by the Great Place to Work® Institute as one of the best places to work in the country, currently employs 800 workers, most of them in Frankfurt/Oder, the place of their German manufacturing operation. They are in the process of expanding these operations to double production and create another 500 jobs, according to their PR release of February 25, 2011.

    6) If the German consortium of blue chip companies, scientists, and private individuals is able to solve the financial and technical challenges of importing solar energy from the Sahara, then the ambitious mega-project “Desertec” as it is called, could also benefit FSLR. Just imagine the thousands of square kilometers of solar panels necessary to supply north Africa and all of Europe with electricity. But it will take time and political stability in the north African countries for this project to become reality.

  • Report this Comment On September 08, 2011, at 5:17 AM, MichaelDSimms wrote:

    Good luck with your solar ventures. I invested once in solar and will not get burned again. It's a good idea but it is not a feasible solution to viable energy. At least not now, maybe in 10 years.

  • Report this Comment On December 25, 2011, at 7:39 AM, webmind wrote:

    Solar power will need a major technological breakthrough to gain traction. Until then it is dead money.

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