|
Published: February 12, 2010
Throughout the 1990s tech boom, Dell (Nasdaq:
DELL) made life miserable for any other firm trying to sell
computers. Its lean operations enabled it to generate solid
profits even as price wars kept most rivals' bottom lines in the
red. First Solar (Nasdaq: FSLR) has taken a page from
Dell's playbook, establishing a cost structure and pricing model
that ensure profits for itself and pure misery for its rivals.
There is a key distinction between Dell and First Solar,
however: Dell held no inherent technical advantage and was
ultimately unable to distinguish itself as computers became
commodities. First Solar's intellectual property, on the other
hand, is a key differentiator. The company developed a novel and
successful way to mass produce solar cells using cadmium and
tellurium in an industrial process that allowed it to use very
small amounts of these metals. This reduced its costs to about
half of its competitors.
First Solar is now the global leader in the production of
thin-film solar, which captures less of the sun’s energy than
traditional silicon-based solar panels but can not only be made
far more cheaply but also can be deployed in a wider variety of
applications. The company’s aggressive pricing led to a sharp
rise in sales in recent years, even as demand for other solar
players’ panels flattened out.
The solar industry is set to suffer the ill effects of a
spending boom that started two years ago, when oil prices led
investors to pump money into additional solar-panel production
capacity. In recent quarters, global supply has been ramping up,
creating a glut that likely will hammer prices later this year.
This helps explain why earnings estimates for First Solar -- and
all of its peers -- have been falling in recent months. Stock
prices in the group have followed suit.
When the dust settles, investors will seek the companies with
the most compelling technological platforms and the strongest
balance sheets. First Solar, already the low-price leader, has
consistently been able to lower its manufacturing costs, which
are set to fall even further in coming years. In 2007, the
company was able to build modules for roughly $1.40 per watt of
power. That figure breached the $1 mark late in 2008, and could
approach $0.75 sometime later this year. The company now spends
roughly $100 million per year on research and development.
Rivals utilizing the traditional silicon-based approach have
also lowered production costs, and the gap between the two
technologies has remained relatively constant. Realizing that
rivals might willingly lose money on contracts in order to
preserve market share, First Solar has used its robust balance
sheet to buy up demand. It's acquired development rights to
build major power plant projects that ensure a steady need for
the company’s gear. That shift has forced investors to grasp a
changing business model – one with higher sales but lower profit
margins. The company issued sales guidance that was well above
consensus forecasts, though profit forecasts were only in line
with existing expectations.
As you can imagine, that’s a lot for investors to digest,
which explains why they have been walking away from the stock.
Its shares have fallen nearly -50% since last June. The
long-term prognosis is for a continued upturn in solar-cell
demand that will catch up to the industry supply glut, probably
in 2011. That should help prices stabilize or even rebound.
Couple that with the fact that First Solar is expected to
complete the production of new facilities later this year, and
First Solar may see sales and profits rise at a +20% to +30%
clip in 2011.
First Solar shares have rarely traded this cheap -- currently
for about 14 times forecasted earnings. That’s roughly on par
with the broader market, and discounts the value of the
company’s pristine balance sheet (roughly $600 million in net
cash), leading-edge technology, and dominant market share of
roughly 20%. Although it will take some time before investors
look out to 2011 and beyond, when they do, they will see an
industry – and a stock – that is poised to make a continuing
dent in the global energy picture.
-- David Sterman
Contributor
StreetAuthority
P.S. My colleague Andy Obermueller recently recommended First
Solar for its tie to a huge Chinese government contract. Andy
calls it a "serious growth stock best suited for longer-term
investors." If you can't afford to wait for the "long-term" you
should definitely check out one of his latest discoveries: It's
a
little-known stock that he thinks could generate a +257%
gain in the next year -- driven by increasing global demand and
strong government action.
Go here to check out Andy's briefing on this opportunity. |
