There are only going to be so many survivors coming out of the solar industry's current doldrums. If the market's reaction is any indication, First Solar (Nasdaq: FSLR) isn't one of them. The stock has been pounded over the last year and is now so low that I think the company needs to begin thinking about ways to unlock value. It has two very distinct businesses, manufacturing and project development, and it may be time to split them into two.
Would it be a wise move? Let's put some numbers together to figure it out.
Thin film isn't dead... yet
The biggest question facing First Solar right now is the future of thin-film modules. First Solar's modules cost less than crystalline silicon (for now) but they're far less efficient. But there are advantages for thin film in low-light conditions, making the modules appealing for some applications.
Even if manufacturers like JA Solar (Nasdaq: JASO), Trina Solar (NYSE: TSL), and Suntech Power (NYSE: STP) are able to catch First Solar on a cost-per-watt basis the company's thin film modules will have some value in certain applications. And with a 15.4% gross margin in the first quarter, the company is making more money per panel than any of its rivals.
So how much might the module business be worth on its own? After closing its Germany plant, First Solar now has about 1.7 GW in capacity. If we guesstimate that long-term the company may be able to squeeze $0.05 to $0.08 per watt in profit from manufacturing (around a 10% margin), the company could make $85 million to $136 million per year in profit. An enterprise multiple of 8x would mean a value of $680 million to $1.1 billion.
A few years ago, the thin-film manufacturing business was worth around $20 billion, so there must be some value there, right?
FSLR Market Cap data by YCharts.
The exact value the market would place on the manufacturing business is up in the air, but the range I've outlined above seems reasonable.
Projects have value in today's market
First Solar has a 2.7 GW pipeline of projects, largest in the industry. This pipeline has value if it was a separate company, and based on what I heard at the GTM Solar Summit last week, there are people who would like to see more downstream companies on the public market because they're less risky than manufacturers. The business even has a couple of strategy options available.
A strictly project development company would be able to use modules from any company, creating projects with the lowest levelized cost of energy, which is what matters for utility scale project. The project company could build utility scale developments and sell this to investors, much the way First Solar and SunPower have done in recent years. In this strategy, the company would roll projects over into new projects regularly.
In another strategy, the company could build projects, own them, and pay a dividend or roll the money into new projects. The second strategy would be similar to what NRG Energy (NYSE: NRG) is doing in the space, except it would capture profit from building and owning the project, so it would be higher-margin than NRG's solar business.
So, what would such a company be worth? In 2010, SunPower paid $277 million for a 1,200 MW pipeline in its acquisition of SunRay. That was $0.23 per watt of projects in the pipeline at the time. That may be the top end of what we could expect First Solar's project unit to be worth, but it is a starting point for valuing the company as a separate unit.
|
Price Per Watt |
Value of First Solar's 2.7 GW Pipeline |
|---|---|
| $0.13 | $351 million |
| $0.18 | $486 million |
| $0.23 | $621 million |
I think $351 million to $621 million for this business would be a conservative estimate, especially as the company adds project pipeline in new markets.
Splitting a strong balance sheet
First Solar isn't sitting too badly on the balance sheet, either. The company has $307 million of net debt when you subtract cash and marketable securities from long-term debt. There is also $705 million in inventory and balance of system parts sitting on the balance sheet, so there is value to unlock there.
Foolish bottom line
With a market cap of $1.44 billion and net debt of $307 million, I think First Solar might be worth more as two separate companies, but it isn't a slam dunk yet. I've outlined how I think the company could be worth as much as $1.7 billion after being split up, even before considering value that could be unlocked from the balance sheet. This is about what First Solar's enterprise value is right now, so if the stock falls further, it's a strategy the company should consider.
We could also look at a book value of $3.2 billion for the equity alone. The company's market cap is about half of that now, so it should be thinking about how to unlock that value sooner rather than later.
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