First Solar (FSLR 2.73%) has been through its ups and downs over the last two decades in the solar industry. The company was once a dominant solar manufacturer, but was overtaken by improvements in cost and efficiency -- and then made an improbable comeback. In 2019, the industry has consolidated to a handful of large solar manufacturers with enormous scale (including First Solar), and installations are growing steadily.
The current environment is the most stable First Solar has experienced in over a decade, and that may make the company a great way to bet on the solar industry long term.
Image source: First Solar.
A solar panel that can't be stopped
Every time it seems First Solar thin-film technology is going to fall behind that of competitors, the company seems to prove the doubters wrong. The Series 6 solar panels that are being produced today are up to 18% efficient at turning the sun's energy into electricity, and as productive as 445 watts per panel.
First Solar's efficiency is surpassed by that of a number of competitors, but efficiency alone doesn't tell the whole story. Thin-film solar panels typically perform better in low light, warm temperatures, and harsh conditions. Even a less efficient solar panel can compete in those situations because it's producing power more of the time.
The large size of First Solar's Series 6 solar panels, which measure 2.0 meters by 1.2 meters, also means fewer panels need to be installed per project. This helps lower cost per watt installed, making the product more competitive. At the end of the day, First Solar has managed to engineer a competitive solar product with thin-film technology that no other company has made work at scale.
A balance sheet any solar company would envy
No solar company has as strong a balance sheet as First Solar's, which is an advantage the company leans into. At the end of the first quarter the company had a net cash balance of $1.7 billion, and it expects to end the year with $1.7 billion to $1.9 billion in net cash. This is all while completing the upgrade of production facilities to Series 6.
Over the last decade dozens of solar companies have gone bankrupt because they have taken on too much debt and can't make sufficient money producing solar panels. First Solar has managed to generate excess cash, and even expanded production without taking on debt. That's a huge strength that gives the company a cushion in bad times, and could eventually lead to technology or asset acquisitions that will drive growth.
Interest rates
One tailwind that shouldn't go unnoticed is low interest rates in the U.S. The lower interest rates are, the more valuable renewable energy projects are, because future cash flows are discounted by investors at a lower rate. If solar projects are more valuable, developers will be more willing to build projects, which increases solar panel demand. Since most of First Solar's demand is in the U.S., it gets a disproportionate amount of benefit from good conditions here.
Increased demand for projects has two benefits for First Solar: First, it will increase the volume flowing through the industry, and with it the prices for solar panels. This will help sales and margins for First Solar's manufacturing business. But First Solar also develops about 1,000 MW of solar projects per year, and those projects become more valuable as interest rates fall.
Another more subtle benefit is that First Solar has more U.S. solar manufacturing than any other company, with 1,800 MW of capacity at the end of this year. If U.S. solar demand increases, First Solar will be one of the first beneficiaries, and could even benefit from tariffs on solar imports from Mexico or China. Low interest rates in the U.S. may be a huge help for First Solar.
Value in a growing industry
Not only is First Solar well positioned in an attractive industry, the stock looks like a good value for long-term investors. The company's market cap is just $6.6 billion, with an expected $1.7 billion to $1.9 billion in net cash by the end of the year. Management also expects $2.25 to $2.75 in earnings per share this year, even as it continues to upgrade manufacturing equipment.
First Solar doesn't come without risks, and there's a possibility global solar demand shrinks or new technology disrupts its competitive advantage. But with a number of tailwinds in 2019 and a stock that looks like a solid value, this is a great energy stock to hold long-term.
