What Is First Solar Inc's Edge Over Competitors?

Despite the solid returns that solar companies, including First Solar (NASDAQ: FSLR  ) , have delivered in the past few years, the sector still carries a burdening negative sentiment. For a while, analysts swamped investors with stratospheric hype about the solar industry's prospects, saying that it will be the next big industry to break out. Sadly, it has been hard to reconcile these towering prospects with the actual reality on the ground. The industry's takeoff has been significantly delayed.

This situation partly explains why First Solar's amazing first-quarter results have not been fully priced into its stock. First Solar reported first-quarter diluted earnings per share of $1.10 compared with EPS of $0.66 in the year-ago quarter, a 67% year-on-year leap. Similarly, First Solar's total net income increased to $112 million in the quarter, up from $59 million in the year-ago quarter.

Entry point for long-term investors
By any measure, First Solar's first-quarter performance was compelling. Investors, however, responded by selling off shares. This shows one of two things: Either the broader market does not fully appreciate the prospects that underlie First Solar, or worse, the market fears that the stock is approaching a plateau.

First Solar's stock, which is currently trading at around $60 a share, has increased from lows of less than $20 a share last June. But the current share price still represents a 67% decline from mid-2009 when the stock was trading intimately close to $200 a share. These are the kinds of time horizons that long-term investors should watch -- five years or more.

The chart below provides deeper insight into First Solar's share-price movement over the past five years.

First Solar Share price since mid May 2009; Source: Yahoo! Finance

Despite the gains that First Solar has made over the past year, there is still more room for upside in view of the compelling prospects that lie ahead. These conditions signal a good entry point for long-term investors. There are a number of formidable drivers that will sustain First Solar's first-quarter sales momentum and present an opportunity for long-term growth investors to make solid returns in the coming years.

Solar installations in the U.S. are rapidly accelerating due to declines in installation costs. The cost of installed solar equipment has dropped by more than 50% since the beginning of 2010, according to the nonprofit Solar Foundation. Naturally, these cost declines have significantly induced the uptake of solar in various industries and residential areas. The Energy Information Administration (EIA) said in previous statements:

Natural gas-fired power plants accounted for [slightly more than] 50% of new utility-scale generating capacity added in 2013. Solar provided nearly 22%, a jump up from less than 6% in 2012. 

Solar added nearly 3,000 MW of new capacity in 2013. A separate projection from the Solar Energy Industries Association predicts that the sector will expand by another 6,000 megawatts of capacity this year.

First Solar in a position to capitalize on demand
Most of the growth in the U.S. solar industry is largely concentrated in California. The chart below is testimonial to this statement.

Source: EIA, note: Data includes facilities with a net summer capacity of 1 MW and above only

Most of First Solar's smaller competitors are largely confined to states such as Arizona and California, where solar uptake is markedly high. First Solar, however, has the scale to pursue opportunities in other states that have still not extensively explored the option of solar energy. As fellow Fool Brandon Workman discussed in a previous article, First Solar has notably increased its involvement in the solar value chain. It no longer focuses solely on manufacturing but on development as well, cutting out the middleman and increasing affordability relative to manufacturers that are not involved in the entire value chain.

As expected, seizing control of the entire solar energy value chain requires scale --which First Solar has -- as it implies absorbing all the costs that would have otherwise been met by middlemen. On the bright side, it gives First Solar a unique pricing advantage over other players in the broader solar-energy industry, especially in the current market environment.

As I discussed in a previous article, according to the World Bank's "Global Economics Prospects" report released in January, the global economy is finally turning a corner following the global financial crisis. This essentially means that the global economy is moving along the recovery phase of the business cycle.

The overarching theme going forward will thereby be infrastructure expansion, implying that demand, and in effect price levels for industrial products, will track upward. To lower overall manufacturing costs, most industries will turn to cheaper sources of energy. This puts solar in the spotlight, considering the continual decline in installation costs over the past few years.

An ability to present attractive packages and flexible financing options due to full involvement in the solar value chain thereby gives First Solar the tools to capitalize on growing demand for solar as a cheaper and cleaner energy alternative. This should allow First Solar to increase market share outside of California and Arizona going forward, substantially increasing its overall market share.

Fool's takeaway
Solar is taking off. And being there when it happens is not enough. Long-term investors should move beyond the market euphoria and identify plays such as First Solar that are still largely underpriced considering the uniquely advantageous positions they find themselves in.

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  • Report this Comment On May 28, 2014, at 10:11 AM, muirmm wrote:

    Lots of info here about how the solar industry as a whole is booming. No info about why First Solar might have an edge over other companies, except that it's "cutting out the middlemen". I believe it has no moat at all, and would sooner short it than buy it (although I am doing neither).

    If you're selling a commodity, you need a really good reason for saying you're better than your peers. ANYONE can, and will, tighten up their supply chain. Until I see real evidence to the contrary, I am going to expect First Solar to go down in flames as industry pricing continues to drop. At some point, it will either have to price its product below its costs, or not win any bids. That will look ugly on the bottom line.

  • Report this Comment On May 29, 2014, at 9:17 AM, Yieke wrote:

    Thanks for your comment muirmm. I agree with you on some points, including the fact that at some point first solar will have to cut prices.

    I however believe because of its scale, it can cut out the middleman to reduce costs while simultaneously reducing price points with greater ease relative to smaller players. This should give it an edge considering declining price levels is a situation facing the overall industry

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