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Solar stocks have gotten crushed this year due to an influx of cheap supply from China, which has caused margins across the industry to shrink. As a result, many solar stocks have plunged this year.
But it would be a mistake to write off the solar power industry entirely. The long-term picture remains bright, as the U.S. is seeing high growth in renewable energy. The solar industry can be a mine field, so it is important to pick the best-in-breed companies.
First Solar (NASDAQ: FSLR) is a highly profitable company with a strong balance sheet and a very cheap stock.
Solar Stock, Sunny Profits
With oil and gas production ramping up in the U.S., one might think the renewable energy industry has been cast aside. But that isn’t the case; instead, renewable energy is a true growth industry. The U.S. Energy Information Administration predicts total renewables used in the electric power sector to increase by 10.5% in 2016 and by 4.3% next year.
The utility sector is one specific area which is seeing huge growth in renewables, and solar is leading the way. Furthermore, the EIA expects utility-scale solar capacity will grow by 60% this year and by another 25% in 2017. In fact, solar energy is growing at such a rapid pace in the U.S. that the projected amount of solar capacity at the end of next year would be nearly double the capacity level at the end of last year.
Solar stocks have fallen on hard times this year due to a global supply glut, particularly from exporting nations like China. That being said, First Solar is somewhat insulated from the margin erosion taking place in the industry more broadly. As the biggest solar company, First Solar is the industry leader, and enjoys the benefits of scale. It has remained solidly profitable throughout the year, while many other smaller solar companies are losing money.
For example, First Solar earned $546 million in net profit last year, which was a 38% year over year increase. The company set a company record last year with $3.6 billion in total revenue, up 6% from the previous year.
First Solar stock has taken it on the chin this year. The stock is down 42% year-to-date, but this could simply be a great buying opportunity for value investors. Shares of First Solar trade for a forward price-to-earnings ratio of 16, which is on par with the S&P 500.
The selling pressure intensified after First Solar reported earnings last quarter and cut its outlook for the full year. Management took down its 2016 earnings per share guidance by 12%, but the company still expects to earn $3.78 per share in profit at the midpoint of its forecast.
Buying Opportunity in First Solar Stock
First Solar’s cheap valuation could be a margin of safety. Sentiment has become very negative, but could change going forward. First Solar has a strong balance sheet, which is another margin of safety for investors. The company ended last quarter with $1.7 billion in cash, cash equivalents, and marketable securities, compared with just $161 million in long-term debt. First Solar has a net cash position of $1.4 billion, which represents 35% of its current market capitalization.
That is a huge cash buffer which allows the company to continue investing in its strategic growth initiatives, or to return cash to shareholders by buying back First Solar stock at such low levels.
The solar industry is going through a period of upheaval. It is likely that many producers at the high end of the cost curve will be pushed out due to oversupply. But First Solar is a premium name in the industry, with a long runway of growth ahead for the solar industry. At such a cheap valuation, now could be a great buying opportunity for First Solar stock.
Disclosure: The author personally owns shares of FSLR.