By Liz Moyer and Peter Nurse
Investing.com – With Congress all-blue, President-elect Joe Biden's $ 2 trillion clean energy plan has a better chance of success, and that's welcome news for solar companies.
The prospect has raised the energy sector this year after being the dog of the world overall for a decade.
First Solar Inc. (NASDAQ 🙂 could benefit from this trend, but will weaker profitability cause it to lag behind its peers in the solar module market?
Investing.com's Liz Moyer argues for First Solar's growth, while Peter Nurse explains the downside.
The cop case
First Solar of Tempe, Arizona, manufactures solar panels and modules and is thus able to capitalize on Biden's ambitious clean energy plans.
As a candidate, Biden promised to install 500 million solar panels in the US over the next five years, and he may come up with other plans that could shed light on the solar market.
The aim is of course to stop the use of fossil fuels, especially coal. The International Energy Agency said renewables are on track to overtake coal as the largest source of electricity by 2025, adding that solar is leading the way ahead of wind and other renewable sources.
First Solar is a major manufacturer of what are known as thin-film panels, which cost a third less to manufacture, and which can work well in various climates including humidity and snow. They are easier to install than traditional panels and work in low light.
The stock hit a 52-week high on Friday and is up 81% over the past year.
It differs from others in its balance sheet. First Solar had approximately $ 1.4 billion in cash at the end of the third quarter that could be used to generate interest income or invest in new technologies. However, some competitors owe debt.
First Solar was also able to maintain profitability through the pandemic shutdowns last year. According to analyst forecasts, it is on the right track to post earnings per share of USD 3.62 at the end of 2020. This equates to earnings per share of $ 1.48 in 2019. Revenue also declined marginally last year and is expected to return to 2019 levels by the end of this year – just over $ 3 billion.
Early estimates for 2021 say EPS will slow to $ 3.44 for the full year, but it's early.
Another benefit from First Solar is the renewal of a clean energy investment tax credit that could generate more revenue. A green congress could also pass more laws that could increase awareness and sales in the solar space.
Solar energy used to cost between 140 and 150 US dollars per megawatt hour (MWh) the evening before Investment tax credits. However, by 2020 the cost had dropped to $ 25-35 per MWh, according to the Motley Fool. That makes solar less expensive than fossil fuels, and costs should continue to fall. That puts solar on the path to have the lowest cost of mass energy, even when you factor in the cost of the battery.
First Solar's backlog means growth will continue to pick up, said Motley Fool. The company currently has an order backlog totaling 12.2 gigawatts of system sales and 8.3 GW of additional opportunities for the middle to late phase in the pipeline, according to the analysts. "In perspective, the company's current production capacity is 5.5 GW, which means there will be years of future sales."
The bear suitcase
It's a truism that solar power stocks will find more love in Washington in the next few years than they have in the past four years. Even so, not all solar stocks are created equal; First Solar is worth selling.
The company has streamlined its activities to focus on its core business, the manufacture of thin-film solar modules. It's not that big of a player in the solar industry after getting rid of its asset ownership business, its North American operations and management business, and its power plant execution unit.
This means First Solar is a more specialized company that could translate into greater efficiencies and better margins in the long run, but doesn't have the immediate growth opportunities that some of its competitors have.
It is already showing worrying signs of a slowdown in profitability. According to FactSet data, First Solar is expected to post earnings of $ 3.62 per share by the end of 2020, but earnings are estimated at only $ 3.44 by the end of 2021.
It is this expected drop in earnings that led the influential investment bank Goldman Sachs (NYSE 🙂 to downgrade its stance on First Solar stock from "buy" to "sell" earlier this week.
The bank expects First Solar's gross margin and earnings per share to peak by mid-2021 and EPS to decline by 2022 at an average annual growth rate of 17%.
Over the same period, First Solar's colleagues will benefit from earnings growth of 20-30%, the bank added.
This negative assessment is despite the favorable regulatory environment. Due to the time pressure, the incoming Biden administration could concentrate on other more pressing priorities.
Even with wins in both seats in the Georgia Senate, the new administration still has to seek Republican moderates to pass swift legislation, which means some of its more ambitious proposals could be watered down.
"We suspect that Joe Biden will first try to advance infrastructure plans that are more bipartisan," said ING analyst James Knightley earlier this week in a research report. "However, its $ 2 billion green energy plan to decarbonize US power generation by 2035 is being pushed back even further by Republicans."
According to Investing.com data, the stock is already trading more than 50 times behind 12-month earnings. That's expensive enough. If, as Goldman says, revenue goes down from here, things won't look cheaper.