Published October 23, 2013
Solar power has become a bit of a pariah on Wall Street after years of high-profile bankruptcies and failed capital-intensive projects. But this game-changing industry is itself changing, and smart investors may want to become “enlightened”. (Sorry, couldn’t resist.)
The change here is profitable utility-scale solar power, and one company has a strong advantage in the cells that make this possible (cadmium telluride cells) as would-be rivals drop out. First Solar (FSLR) shares have quietly beaten the buzz to soar 80% since the presidential election, so the question is if and when the investor press will accept how strong a global player this company is in a still-vibrant industry.
FSLR recently announced that it has taken over the work of building a massive solar farm on Paiute tribal land in Nevada, demonstrating how eager management is to keep spending the money it takes to grow the business and deepen its project pipeline.
These are large utility-scale projects, not incidental residential solar installations. Even at a manufacturing cost under $1 per watt, a 250-megawatt deal represents a substantial boost to FSLR cash flow over the next few years as construction ramps up. Once the panels are installed, it should push enough electricity onto the grid to light 100,000 Los Angeles homes without having to hook up every house individually or entice families to invest in green power.
While FSLR has been criticized for failing to address the residential rooftop market, this project will unlock more solar capacity than all U.S. households put together installed in the second half of 2012. The company can leapfrog the retail channel entirely and still maintain a dominant position in terms of its overall North American install base.
Not only that, but FSLR’s technology is a much better fit for industrial scales. Materials and manufacturing costs have come down enormously throughout the solar industry, but cadmium telluride cells are still much cheaper on a per-watt basis than the traditional silicon used in Chinese modules.
It’s true that every square inch of cadmium is less efficient at converting sunlight than silicon, but the difference really only applies on residential projects where space is limited to a roof. Large solar farms can make up the difference through pure volume – FSLR’s new Nevada project; for example, will sprawl across a 2,000-acre desert territory in order to collect its megawatts.
Unfortunately for silicon-based rivals like Yingli Green Energy (YGE) and Suntech (STP), the cost-for-efficiency tradeoff of cadmium gives FSLR the freedom to compete on price. YGE and STP in particular are already staring at negative operating margins even after government subsidies are factored into their results.
FSLR is growing its share of the global solar market, albeit not as quickly as some analysts would like to see. And unlike the loss-generating silicon establishment, FSLR has room in its margins to expand its install base. An operating margin of 7.5% may not look spectacular, but in the every-penny-counts world of solar power, it is infinitely better than the 29% STP lost on every sale.
It’s also important to note that FSLR is sitting on well over $1.2 billion in cash and short-term investments, nearly twice what it needs to service current liabilities, even if the business grinds to a halt. That cash cushion is what makes strategic transactions like the Nevada deal possible. In extremis, it can also carry the company through a prolonged price slump or deliberate price-cutting campaign that weaker silicon rivals might not have the resources to survive.
The real overhanging question for FSLR has been whether its position in the lucrative utility project engineering and contracting space is secure. General Electric (GE) raised alarms in 2011 for threatening to build its own solar manufacturing facility – then promised to be the biggest in North America – but the barriers to entry even for a global industrial giant are evidently too high.
Just a few months ago, GE cancelled the project and traded its solar technology portfolio for a 2% stake in FSLR instead. GE will now incorporate cadmium cells into its own power plant projects, while leaving the door open to take over operation of FSLR plants as they become operational.
The first test of this partnership came a few weeks later when 50 megawatts worth of Canadian capacity moved into GE’s gigantic $1.5 billion solar portfolio. We may see more in this vein in coming months.
Hilary Kramer is the editor in chief of the subscription newsletters: Game Changers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return Portfolio and Inner Circle. Formerly, Hilary was the CIO of a $5 billion global private equity fund. She has an MBA from the Wharton School at the University of Pennsylvania and began her Wall Street career as an analyst at Morgan Stanley. Hilary is the author of The Little Book of Big Profits from Small Stocks (Wiley) and Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends (Free Press). To learn more about Hilary Kramer visit: http://GameChangerStocks.com.