Rising Star Buy: First Solar
This article is part of ourRising Star Portfolio series.
Investors could be forgiven for believing that the sun is setting on solar companies. Highly recognized solar stocks like Solyndra, Evergreen Solar, and Intel (NAS: INTC) -backed SpectraWatt have all recently filed for bankruptcy. These high-profile failures have only fueled the investor pessimism surrounding an alternative energy sector that's seen its share of troubling questions in the last year or so.
Given the long shadow over sun-powered energy alternatives, now must be a bad time to buy in, right? Actually, investors' gloom-shrouded outlook presents us with a great opportunity to buy strong solar companies for the long term. Despite the dark sentiment facing this renewable energy sector, I've decided to pick up some shares of industry leader First Solar (NAS: FSLR) for my Rising Star portfolio.
Tempe, Ariz.-based First Solar boasts the largest market cap among solar companies. First Solar designs and manufactures low-cost photovoltaic (PV) solar power systems and modules. It's working to reduce solar electricity's price to affordable levels, diminishing the technology's reliance on government subsidies.
In 2010, First Solar produced nearly 1.4 gigawatts of solar modules. The company also boasts that it's the largest thin-film PV solar module manufacturer. Another key differentiator is First Solar's use of cadmium telluride thin film to make its modules, in place of costlier silicon.
Even as clean-tech investments look ever more dubious -- especially when our government's doing the investing -- First Solar has received $5.3 billion in loan guarantees to construct four major solar farms. Better yet, it hasn't had to seek any more loan guarantees for its planned second U.S. factory. The company's gaining a reputation as a strong contender that can stand on its own.
First Solar has also created the first comprehensive module collection and recycling program in the industry. According to its Form 10-K, approximately 90% of each module it collects is recycled into otherwise costly materials for use in new products -- a cost-efficient and environmentally responsible initiative.
Why I'm buying
In January, I bought shares of rival SunPower (NAS: SPWRA) for my Rising Star portfolio. I chose SunPower because it looked like the most compelling bargain, and rejected my initial impulse to go for the recognized industry leader, First Solar, which traded at a premium price.
The situation changed rapidly. I sold SunPower in June after French energy giant Total (NYS: TOT) announced its plans to acquire a majority stake. Total's involvement could be a boon; deep-pocketed majority shareholders can definitely benefit up-and-coming companies in nascent industries. However, I also felt that Total's involvement made my investment less certain, and might even hurt SunPower's business one day.
Selling SunPower didn't mean giving up on solar power overall, of course. With First Solar shares now down about 35% since the beginning of 2011, it's currently trading at a mere eight times forward earnings. That same multiple made SunPower look like such a bargain at the beginning of the year. In addition, First Solar's PEG ratio is currently just 0.52.
And now, the risks
Investors' concerns about the solar industry aren't unfounded. Solyndra's bankruptcy has generated even more notoriety (and negativity) because that company received significant financial support from the U.S. government, and even garnered a high-profile visit from President Barack Obama. That aid was not enough to help it succeed.
The market currently believes that Chinese solar companies, bolstered by major support from the Chinese government, are peddling cheap sun-powered wares, leaving American solar companies in the dark and in the red.
Furthermore, solar subsidies won't be as easy to come by as they were in the past, since many of the governments that once handed them out now face serious fiscal issues. Many of First Solar's components customers are in Germany, Italy, France, and Spain -- not ideal sites, given the Eurozone's current financial turmoil. Closer to home, green technology may end up being low on our own government's spending priorities as the economy worsens.
Much like any renewable energy segment, First Solar competes not only with traditional fossil-fuel derived energy, but also other alternatives like wind, hydropower, geothermal, biomass, and tidal technologies.
Foolish bottom line
Many solar companies may fail in the near term, but I believe First Solar's strong enough to survive the industry upheaval. It's always scary when industries consolidate and weaker players fail, but in the long run, it yields more growth for the strongest survivors.
Meanwhile, here's a little sunshine to offset the shadowy uncertainty. The International Energy Agency recently updated its projections about energy generation far into the future, prognosticating that solar energy alternatives could produce most global power within 50 years, with other options like biomass, wind, and so forth supplementing the remainder of energy needs.
This creates a far sunnier outlook, since previous predictions forecast solar options supplying only about 20% of energy needs by 2050.
In other words, picking the winners now as weaker players get winnowed out could pay out major dividends. Every industry cloud has a silver lining, and First Solar's is shining bright.
At the time this article was published
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