Sunday, September 30, 2012

First Solar: Too Volatile For Your Portfolio?

First Solar's (FSLR) business path has not been smooth, and that is why the company recently changed its business direction. First Solar will now focus on providing utility-scale PV systems in sustainable markets with immediate need. This shift in the company's strategy also means it will reduce its focus on the rooftop and off-grid market and focus primarily on serving the utility market instead. This is a major change of strategy for a company that had previously focused on customers that were dependent on government subsidies.

Recent First Solar Developments

On September 11th, First Solar announced that it had signed a deal with Pacific Gas and Electric Company to provide 72 megawatts of solar electricity, which would be generated at two plants that are being developed in California. One project is a 32 megawatt project in Kern County, and the second project is the Cuyama project in Santa Barbara County. Construction of the projects, which will produce enough energy to power some 24,000 California homes, could start in 2013.

On September 10th, First Solar announced that its Agua Caliente solar plant had achieved a peak generating capacity of 250 megawatts. "The project, which is under construction in Yuma County, Arizona, is currently the world's largest operating photovoltaic (PV) power plant and will have a generating capacity of 290 MWAC when completed." First Solar will operate the plant for owners NRG Energy and Mid America Solar. Pacific Gas and Electric has a 25 year purchase agreement for the plant's electrical output. The project is being financed with a loan that is being guaranteed by the U. S. Department of Energy's loan Programs Office.

On August 23rd, First Solar announced that it would develop solar farms in India to help against power outages which have driven demand for electricity derived from sun power. The company plans to take at least a "20% share of India's photovoltaic sales by expanding beyond First Solar's role as a supplier, said Sujoy Ghosh, the new India head of the world's biggest thin-film panel maker."

On August 1st, First Solar's CEO James Hughes said when speaking about Australia "we're positioned to capture at least 30% market share going forward. In June, we announced 2 new projects that we will be designing, constructing and maintaining for AGL Energy in Australia for a combined total of 159 megawatts AC."

First Solar recently announced that it anticipates earning $3 per share in the second half of the year. The $2 billion Topaz project in San Luis Obispo County, California will account for these earnings. Since the earnings from the Topaz project will be accounted for in the fourth quarter First Solar's third quarter earnings will be lower, but its fourth quarter earnings will be higher. First Solar will "build, operate and maintain the project for MidAmerican Energy Holdings. Pacific Gas and Electric will buy the electricity under a 25-year power purchase agreement."

Final Thoughts

First Solar is in one very volatile business. A large number of businesses like Solyndra, Sun Power, and Solar Trust of America have failed. The primary reason that these businesses have failed is because of diminished demand and intense competition. There have been charges that heavily government subsidized Chinese companies like Yingli Green Energy (YGE) have flooded the market with products that are so cheap that foreign companies cannot compete. In addition to dealing with government subsidized Chinese companies, First Solar must compete against companies with increasingly sophisticated low cost products. Companies such as JA Solar Holdings (JASO), Sun Power (SPWR) and Trina Solar Limited (TSL) are strong competitors.

In addition to strong competitors, First Solar faces the dilemma of cash strapped governments, which are no longer willing to subsidize projects to purchase solar energy. First Solar has responded to these problems by changing its business strategy. The company now has the unenviable task of convincing investors that, "building entire solar power plants for other electric companies, rather than merely manufacturing and marketing solar panels, is the way to go." That could prove to be a hard sell. But, the company has a good start, because in the second quarter, it increased revenues by 92% and increased net income by $560 million. The company also has new projects under way in the United States, India, and Australia. In addition the company sees the potential for additional projects in Japan and the Middle East.

First Solar is down by 77% over the last 52 weeks but up by 47% over the last 3 months. Risk adverse investors should not consider investing in First Solar. The stock is highly volatile, and there is a high possibility that the investment could lose money. But, investors who are willing to take a risk can take comfort in knowing that an investment in First Solar could possibly result in a big reward. I think that First Solar stock is more suited for short-term traders, than for long-term investors.


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