First Solar: Why buy this S&P dog?
A fund manager ups his stake in the worst-performing stock in the index.
First Solar (FSLR) earned two unfortunate titles in 2011: the worst-performing stock in the S&P 500 after falling 86%, and one of David Einhorn's most successful shorts. Yet Brian Rogers, the manager of $500 billion at T. Rowe Price, doubled his stake in the stock in the first quarter. Amid all the problems plaguing the solar industry, why would anyone choose this stock?
The Tempe, Ariz., company is the world's largest maker of thin-film solar panels. First Solar began 2011 at $133 per share but steadily declined to $33 by year's end as events developed in Germany, the world's largest photovoltaic market. Investors began selling in earnest around the time that German lawmakers passed a law in February which cut solar power subsidies as much as 15%, six months earlier than they had planned. Germany accounted for approximately 23% of First Solar's 2011 net sales.
The German Renewable Energy Act (EEG) went into effect in 2000 and stimulated a burst of renewable energy business in the country. The government guaranteed operators a feed-in tariff fixed for 20 years and a purchase guarantee for the electricity produced. "This secures investments made in solar energies and has resulted in an enormous increase in the number of jobs in the industry," the Federal Ministry of Economics and Technology said.
First Solar's following of the subsidies has been the primary cause of its recent instability. Last year, approximately 80% of the industry's annual sales have come from a few countries with strong subsidy programs. "In 2011, the solar industry significantly expanded production of solar cells while a number of markets reduced their subsidy programs that stimulate demand for solar power," the company said.
From subsidies to sustainable markets
While robust government subsidies were in place, First Solar's stock soared. In 2008 it traded for over $300 per share, and in 2009 to 2010, it hovered in the $100 and $200 per share range. It also traded for almost 100 times earnings in 2009, and dropped to the upper teens in 2010.
Several notable value investors bought shares beginning in 2011 when the price-to-earnings multiple fell to near 20. John Hussman, for example, lost approximately 88% on his First Solar investment, and Lee Ainslie has lost over 80%, on paper.
Rather than wait to pounce on the next subsidized market, First Solar has announced it will progressively alter its business strategy in 2012. Going forward, it will seek to provide utility-scale PV systems in sustainable markets where demand is great, which will place it in direct competition with conventional power companies.
By 2014, First Solar plans to derive revenue from sustainable markets almost exclusively. It sees opportunities both in the U.S. and Europe, but also the Middle East, India, China and Africa, where there is a fundamental need for energy. "The business we're describing will be capable of strong, consistent and profitable growth for decades," the company says.
But the company faces at least three major obstacles to successfully joining the traditional energy market, as it outlined in a December conference call. One, it has to reduce costs to $0.10 to $0.14 a kilowatt hour in most markets, which will require it to "cut costs, streamline its business model and increase the efficiency of its modules. Second, it will need to work with policymakers to work solar power into its policies. Third, it will need to shift to its new direction while managing capital and remaining profitable while most of its business is still in a deteriorating market.
"In order to thrive, First Solar must grow massively in this environment (to grow volume at a 20% CAGR, First Solar must deploy roughly 65GW over the next 10 years)," the company said.
For 2012, the company is expecting net sales of $3.7 billion to $4 billion and earnings per share of $3.75 to $4.25 per share. This compared to revenue of $2.8 billion and loss per share of $0.46 in 2011.
First Solar issued a cost-saving restructuring plan on April 17, after which shares fell even further to all-time lows.
Though it will take an undermined amount of time for First Solar to implement its new plan and whether it will be effective is uncertain, it is an inexpensive stock and Rogers waited until the best possible time so far to buy it. Its price-to-earnings ratio fell to 4.25 by January 2012, and he paid roughly $36 per share for the majority of his shares, less than book value of $42.16.
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