Is First Solar Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does First Solar (NASDAQ: FSLR  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell First Solar's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at First Solar's key statistics:

FSLR Total Return Price Chart

FSLR Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

39.3%

Pass

Improving profit margin

(51.2%)

Fail

Free cash flow growth > Net income growth

124.4% vs. (32%)

Pass

Improving EPS

(37%)

Fail

Stock growth (+ 15%) < EPS growth

(63.5%) vs. (37%)

Pass

Source: YCharts.
*Period begins at end of Q3 2010.

FSLR Profit Margin (TTM) Chart

FSLR Profit Margin (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(52%)

Fail

Declining debt to equity

(31.5%)

Pass

Source: YCharts.
*Period begins at end of Q3 2010.

How we got here and where we're going
We looked at First Solar last year, and it has picked up two more passing grades in its second assessment to finish with four out seven possible passing grades. The solar industry may have begun to rebound, but most stocks (including First Solar's) are well off their peak of several years ago. While many companies are better now than they were a year ago, a number of them (including First Solar) remain below pre-crash levels on key fundamentals. Will First Solar be to push itself to new highs, or will this solar specialist going to see more cloudy days in its future? Let's dig a little deeper to find out.

First Solar recently delivered market-topping third-quarter results thanks to lowered manufacturing costs, which came in at $0.59 per watt, a notable 12% decline as compared to the year-ago period. In addition, First Solar's cadmium telluride solar products are pushing efficiency ratings of 14%, which would result in cutting production costs to $0.50 per watt. Fool contributor Jason Hall notes that population growth alone will boost long-term demand for cheaper energy, which in turn will drive tremendous growth in the global renewable energy market over the next two decades. As a result, First Solar is likely to reap substantial benefits, thanks to its its dominant position in utility-scale solar power, ceding ground to installer SolarCity (NASDAQ: SCTY  ) and fellow panel manufacturer SunPower (NASDAQ: SPWR  ) in distributed power systems across the globe.

According to the International Energy Agency, solar power was a small slice of the global energy pie, but it's posted a staggering annualized growth rate of 50% over the past five years. The U.S. could become the third largest nation by aggregate installed solar power capacity by next year, thanks to low-interest loans for installation and lower-cost modules. The pipeline of large-scale solar power projects in the U.S. is also expected to grow to nearly 43 gigawatts in 2014, but that's a rather tepid 7% growth rate over current figures. Utility solar developers have been focusing on 30-megawatt-or-lower projects, which surged in number to approximately 2,100, a 33% growth rate that just barely qualified the industry for full investment tax credits.

First Solar could also benefit from SolarCity's first-ever pooled securitization of solar systems, which will open new financing options to fund residential and commercial projects over the next few years. However, First Solar's presence in the distributed power systems market won't increase until its solar panels reach 16% efficiency, which is most likely to happen by late 2015, according to Fool contributor Joshua Bondy. On the other hand, First Solar has already completed several massive utility-scale solar projects, including 550 megawatt Topaz Solar Farm, the 550 megawatt Desert Sunlight Solar Farm, and the 230 megawatt Antelope Valley Solar Ranch. SunPower is also targeting utility installations, and it delivered 579 megawatts worth of solar panels for MidAmerican Energy Company's Solar Star plant project. Fool contributor Travis Hoium notes that U.S. solar manufacturers should also benefit from the booming Japanese solar market, which is expected to install 10 gigawatts of capacity this year as the island nation runs full-bore away from its nuclear plants. Quite recently, First Solar began work on a small 1.4-megawatt solar power plant in Kitakyushu-shi, which is expected to be ready by early next year. Getting an early foot in the door on Japan's solar build-out could give First Solar the edge it needs to continue growing back into the superstar stock investors once hoped it might be.

Putting the pieces together
Today, First Solar has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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