Warming Up to First Solar as a Value Play

 | Feb 27, 2017 | 11:00 AM EST
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For the past several years, I've been enamored with the idea of slapping solar panels on our roof, drawing our power and heating our water from the ultimate renewable energy source, the sun.

Don't get me wrong. I am not anti-fossil fuel, and while I believe the climate is always changing, I am skeptical that these changes are man-made, so this interest is not because I believe it would help save the planet. It's just that the idea of generating power from a renewable source is enticing from a practical perspective to this value investor.

A few years back, we started the analysis process with a solar power company. The end result was slightly disappointing. Covering the roof with solar panels would have generated about half of our power needs, and the break-even period was seven to eight years. While the break-even was not bad, the scenario did not meet my vision of being able to provide all our energy needs and engaging in reverse-metering -- i.e., selling excess power back to the electric utility. Plus, the math behind it all included subsidies, so this was not a free-market solution, and it assumed that other taxpayers (federal and state) would be paying for part of it.

All of this came to mind this weekend as I ran my search for double-nets -- companies trading at between 1x and 2x net current asset value. At the top of the list in terms of market cap is a new entrant to double-net land, First Solar (FSLR) , a leading provider of solar energy solutions. The stock has been hammered over the past year, down nearly 50%, and it has been hurt by low panel prices amid growing competition.

The stock got a boost last week, ultimately closing up about 9% after a wild ride that ensued following the release of fourth-quarter results. Excluding $729 million in restructuring charges, its earnings of $1.24 a share beat consensus estimates by 26 cents. Revenue for the quarter of $480 million was down 49% year over year, but still came in $67 million ahead of the consensus.

The release of year-end balance sheet data revealed that the company is trading at just 1.85x net current asset value. In addition, the quality of current assets, which includes $1.955 billion, or $18.80 per share, in cash and short-term investments, is solid. The company ended the year with just $188 million in debt. In addition, it trades at just 0.77x tangible book value per share.

Clearly the solar industry is in flux, which adds risk to the story, and which is a big reason why FSLR trades so cheaply relative to net current assets and has half of its market cap in cash. There also is quite a bit of variability in forward earnings estimates, which add to the uncertainty. Consensus estimates for 2018 average $1.22 a share, but run from a low of two cents to a high of $3.18, and that's with 19 analysts weighing in. That leaves a great deal of room for earnings surprises.

This will be an interesting story to follow. It also peaks my interest in going back to the drawing board to see if solar is a more viable option for us now than it was when we had the original analysis done.

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