First Solar's (FSLR +2.37%) stock has been beaten up along with most of the solar industry over the past few months. But there hasn't really been much change in the industry lately that investors didn't already know: Solar panel prices dropped by about one-third in 2016, resulting in shrinking margins. A decline in demand in 2017 will also lead to further losses across the industry.
What First Solar has done in response is to double down on its technology upgrades. It announced last fall that it was going straight from Series 4 modules to Series 6, which will bring higher efficiency and a more complete pre-engineered solution for solar power plants. When you combine that with the best balance sheet in the industry, this is an extremely cheap stock.
Image source: First Solar.
The value already sitting on the balance sheet
The first thing to notice with First Solar is the value sitting on its balance sheet. The company had $2.0 billion in cash at the end of 2016 and just $160.4 million in debt. Despite upgrading its entire fleet of manufacturing capacity starting in 2017 and a weak year for demand overall, management expects to have $1.4 billion to $1.6 billion in net cash at the end of this year. Given the current $3.0 billion market cap on shares, First Solar holds half of its full valuation in cash. The rest of the business is worth around $1.5 billion, but we're not done yet.
First Solar also owns 22.1 million shares of 8point3 Energy Partners (CAFD +0.00%) and is a co-sponsor of the yieldco. The value of the shares alone are $276 million at the price shares trade at today. The current dividend yield will have 8point3 Energy Partners paying a dividend of at least $22.1 million in 2017 and potentially more than that.
In total, First Solar's operations are only worth about $1.1 billion to $1.3 billion if you pull out expected cash at the end of the year and the 8point3 Energy stake.
Continuing operations are still spitting out cash
We don't know exactly what First Solar's operations will look like when the Series 6 upgrades are completed in 2019, except that manufacturing capacity will be somewhere around 3 GW and management expects operating margins to be about 10%-15%.
Ballparking value, let's assume sales are $0.75 per watt. This figure assumes some deflation of panel prices and more revenue from system components like racking, inverters, design and engineering, storage, etc. First Solar's current backlog is valued at $1.50 per watt but recent bookings were $0.55 per watt because they were module only contracts. With installations expected to be under $1 per watt sometime in the next 2-3 years it seems reasonable to use $0.75 per watt is a reasonable assumption.
Using that as a jump off point, that would equate to about $225 million in operating income in 2019. If capacity is increased to 5 GW (the 15% op. margin model), the operating income jumps to $563 million. No matter how you look at it, the company will likely generate a lot of cash for the $1.1 billion to $1.3 billion investors are now paying for the operations.
Why First Solar is set up for success
What shouldn't go overlooked here is that First Solar is going to be one of the survivors in a likely industry shakeout in 2017 and will emerge with better efficiency and lower costs than most competitors. As a trusted supplier, it will also be a supplier of choice for developers around the world, especially in extreme environments where its thin-film technology outperforms rivals.
Given the sheer value in the stock and the upside as the solar industry grows, this is a stock that's very cheap on the market.
