Source: Flickr user Jumanji Solar.
In the renewable energy space, many stocks have fallen, mainly as a result of falling oil prices. One notable exception is First Solar, (NASDAQ: FSLR), which has gained 34% so far in 2015.
However, just because a stock has gone up, and trades at a seemingly high valuation (more than 20 times forward earnings), doesn't mean it should be avoided. Here's some of the recent happenings at First Solar, and why you can still buy it even though it's more "expensive."
Why First Solar's share price has risenThere have been a few catalysts recently that have caused First Solar's share price to rise.
One development that make investors smile is the partnership with Apple that was announced in early February. Apple is investing nearly $850 million in a new solar farm and will receive power from 130 megawatts of First Solar's California Flats Solar Project under a 25-year power purchase agreement. Construction will begin this year and will be completed by the end of 2016.
Also pushing shares higher was the Feb. 23 announcement that First Solar and SunPower Corporationintended to form a joint yieldco, which we just learned will be called 8point3 Energy Partners LP. The yieldco will own 432 megawatts of solar projects that generate electricity to sell to customers, and it will use the cash generated to pay shareholders a dividend.
The market received the announcement well, leading to several analyst upgrades and price target increases. That's when the share price really started to take off.
Still a great long-term play on renewable energyAccording to energy experts, world energy demand is expected to double by the year 2050. And solar power is an alternative energy source that is both scalable and affordable to the degree necessary to accommodate the increased demand
So, out of all of the solar companies out there, why choose First Solar?
For one thing, First Solar is arguably the best company at what it does. The company continuously improves the efficiency of its solar panels and has been rather effective at cutting costs in recent years. As a result, First Solar's gross margins expanded by six percentage points over the past year. First Solar's backlog of projects has been building up, and the company should be kept busy for several years with existing orders alone.
And perhaps even more compelling, First Solar's balance sheet is rock-solid. As of the end of 2014, the company has nearly $2 billion in cash and just $217 million in long-term debt. First Solar trades for about 20.5 times forward earnings, but when you back out the cash stockpile, the forward earnings multiple drops to about 14.3. That's actually pretty cheap for a company with First Solar's growth potential.
Is it really that "expensive"?Well, it's tough to compare First Solar to many of its peers, simply because most solar companies aren't profitable. SunPower is profitable, but I would consider it a similar play to First Solar, and it is even more expensive on a P/E basis. Chinese rival Jinko Solar (NYSE: JKS) is profitable, and trades for a much lower valuation of just 6.9 times forward earnings. However, Jinko has about $7.3 billion in debt and about $1.8 billion in cash. If you add that debt to Jinko's $670 million market cap, shares look much more expensive.
Take a look at some of the financial statistics of First Solar and its rivals, and you can see why First Solar makes the best investment. Other solar companies are definitely "more expensive", but this article is about the most expensive stock worth buying.
|Company||Symbol||2015 EPS Estimates||2016 EPS Estimates||Cash($M)||Debt($M)||Forward P/E|
N/M = not meaningful
A word of cautionAlthough I absolutely love First Solar and renewable energy in general as a long-term investment, I want to make sure you know what you're getting into.
The solar energy industry is still very young, and as with any young industry, you should expect some growing pains. In other words, if you're looking for a safe, predictable investment, you should probably look elsewhere.
However, if you have several years to ride out the ups and downs, First Solar is one of the strongest renewable energy companies and could handsomely reward those with the risk tolerance and patience to give it a chance.
The article The Most Expensive Renewable Energy Stock Worth Buying originally appeared on Fool.com.
Matthew Frankel owns shares of First Solar. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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