For many investors, the first word in solar is First Solar
OK, that's actually two words plus a stock ticker, but I think you catch my meaning. This is easily the best-known solar stock in the U.S. markets. But how well do you know the company, really?
They make those solar doohickeys, right?
I've been following this company's twists and turns for going on two years now, and I still learned a great deal from the company's analyst/investor meeting webcast last week. If you are a current or prospective investor in the solar space, this is really a must-listen.
I wouldn't dub the presentation Solar 101, because it does assume a certain degree of knowledge about both solar technology and markets. Call it an intermediate seminar for engaged solar investors.
As with previous occasions, there was no bombshell announcement during the series of presentations by First Solar's top brass. Some analysts came away nonplussed, and at least one downgraded the stock. Such is life as a glamour stock.
Most of my impressions were quite positive coming out of the presentation, though, and I'm going to step through what I found to be some of the day's key takeaways.
On sustainable competitive advantage
Early in the presentation, Chairman and CEO Mike Ahearn noted that the company talks internally about being a 50-to-100-year company. As someone who's refrained from siding with any solar stock for fear of unforeseeable and dramatic shifts in the competitive landscape over the near-to-medium term, that characterization certainly grabbed this Fool's attention.
How can First Solar, the leader in thin-film solar modules, hope to maintain a lead over conventional crystalline silicon producers like Trina Solar
Citing a study by BEW Engineering, First Solar pointed to its superior energy yield (i.e., the amount of energy delivered annually by a system of a given rated capacity) across a variety of applications, from rooftop to ground-mount to tracker. Because of thin-film's superior performance in both sweltering and low/diffuse light conditions, the company's systems appear able to provide 10% to 13% more juice, which makes a big impact on the levelized cost of energy, one of solar's key metrics.
Can't players like SunPower
First Solar spent much less time addressing the competition from new thin-film entrants, other than pointing to its track record. I can hardly blame the company, as it would be largely speculative to draw conclusions about startups that are mostly pre-commercial today. Yet I still can't help wondering what disruptive forces are at work here.
The evolving nature of the business
Aside from sustainability, both of a competitive and environmental nature, one of the other touchstones of the presentation was industry constraints, and how First Solar shapes its business to resolve them.
Both of the company's key acquisitions to date have addressed constraints in different parts of the value chain. In 2007, First Solar picked up Turner Renewable Energy, a project installer, as a means of tackling high balance of systems costs then prevailing in the U.S. market. Then came the OptiSolar acquisition, primarily intended to cut down the multiyear development lead times involved in bringing utility-scale solar projects online.
First Solar made it very clear that it's not getting into the domestic engineering, procurement, and construction (EPC) business to make money. It's doing so to move more modules. By running the EPC business at breakeven, this hurts the company's reported margins, but the company's got no particular margin targets. The financial model here is a return on net assets of 20%, achieved for the first time in 2008. This implies a financial return of 5% in excess of the company's cost of capital, an admirable target explicitly pursued by companies like Archer Daniels Midland
Some investors or analysts might be disappointed with this falling margin profile, but today's unsustainably high margins are linked to unsustainably high subsidies in places like Germany. Those subsidies have helped to nurture a nascent industry, but they have to drop away. The solar industry needs to stand on its own two feet.
Not the easiest feat
As First Solar has argued, scale effects can offset the deterioration in margins, preserving economic profit. Fools should focus on the latter item as First Solar tweaks its business in order to tackle the unique challenges of today's "transition markets" on its way to sustainability in the decades ahead.