Stock Croc recently commented on Seeking Alpha - one of the best places for investors on the net - on First Solar (FSLR). As I cannot comment the whole article on Seeking Alpha, I will do so here.
Stock Croc: Over the past 12 months the price of oil has risen 9.3% and that of natural gas has gone down by 41% while consumption of energy is generally going up with an increase in world population and purchasing power especially in emerging markets. With energy prices so volatile and dependent on a variety of factors that we cannot control, I believe that solar power is an alternative that has a future and First Solar (FSLR) is a good bet.
First part of the analysis so far okay. I second the position on solar energy in general. Good one on solar is: after you did your Capex, you have almost no running costs. What remains to be proven: is FLSR a good bet?
Stock Croc: I particularly like First Solar because it has a global footprint, its process of making solar panels has less stages because it uses tellurium in its solar cells which is also concentrated in the U.S., Japan, Canada and Peru, all friendly places, and the company is transitioning from a technology oriented one to an industrial company which makes its products more efficiently. Finally, at current valuation levels, the stock is undervalued compared to competitors and it might be a takeover target.
Starting with the global footprint: many others have that too. Look at MEMC (WFR) - they look very global to me with production in the US, Europe, and several parts of Asia. With rather limited transport costs, the global production footprint is not so much of an advantage. Low costs - as in Asia - count the most. At least as long no trade wars erupt and good can travel across borders free.
Process costs are a big issue in an industry, that sees more an more price pressure. FSLR has to be even better than the standard technology, as its module efficiency is somewhat lower and not improving as fast as mono-crystal silicon.
The tellurium argument I can not follow at all. Cd-Te is a disadvantage for FSLR. Do you want to have Cd-Te on your roof? What if there is a fire? How much does it cost to take it down after 20, 30 years? Standard technology uses no rare materials in such high quantities! Where is the advantage?
In addition: all solar wafer and panel producers have to become mass producers following a volume strategy and driving out less cost efficient competitors. I guess Yingli, MEMC, ... would claim to be on the same path. We will see, who is fast enough in reducing production costs.
And finally: Just thin a second about FSLR being on the wrong track, betting on the wrong technology. IF that is the case, the company will get indefinitely undervalued, as its price will slowly approach zero.
Stock Croc: First Solar has 86.5 million shares outstanding, a market capitalization of about $2.5 billion and an enterprise value of $2.5 billion as both cash and long-term debt are about the same at about $650 million. Its inventory at the end of 2011 was $530 million compared to $200 million at the end of 2010 underscoring the glut of solar panels and the strong price competition in the industry.
Well, high inventories are never a good sign. Others have the same issue at the moment. We all should watch that number closely. At what price will it sell? When? Revaluations?
Stock Croc: First Solar has a capacity for 2012 in the amount of 2.5 gigawatts but expects to produce around 1.5 - 1.8 gigawatts thus having a utilization of 60%-72% of its factories. The price per watt is estimated to be $0.74 per watt (including the cost of underutilization), virtually unchanged from the 2011 cost of $0.73. I think it is a big positive that the company is trying to reduce the costs of its plant underutilization and improve its module efficiency which is currently at 12.7%. Also, 2012 is a pivotal year as several projects that were started earlier are reaching levels where they will start generating cash flow instead of using working capital.
At those utilization rates I would ask myself: why do they expect to come back to 90 - 100 %? If their technology would be superior, they would be 90 % utilized even in a downturn. So it is not.
Given global overcapacity, why should FLSR recover faster? I have no answer to that one. Guess, this is rather a restructuring issue. Sure they have to cut costs - trying to reduce will not be enough. I guess, with that kind of utilization, they have to shrink.
Stock Croc: Valuation and Competition
First Solar is currently undervalued as it has a price to sales ratio of 0.9 compared to 1.6 for the industry and 1.3 for the S&P 500. Its price to book value ratio is also attractive at 0.70 compared to 4 and 4.6 for the industry and S&P 500, respectively. The past year was a difficult year as European countries started to reduce government subsidies and also because in the U.S. the solar panel manufacturers were rocked by the sudden bankruptcy of Solyndra a few months after securing loan guarantees of hundreds of millions of dollars from the Federal government.
Forget all the S&P comparison immediately. The polysilicon / solar wafer / solar panel market is a totally different kind of horse shoe - not comparable to the S&P500 and not related to the general business cycle.
Comparing FSLR to other solar stocks is also dangerous. This is a race of technologies. Either FSLR got it right and will drive out all the other - or vice versa. Current market values do not tell us, that FLSR is intrinsic undervalued. It just tells us, the market does not believe it will win the technology race. IF you are of different opinion: okay. But then you do not bet on FSLR reaching a median valuation compared to its competition. You bet on the market changing its view on different technologies or FSLR proofing that its technology is superior. (By now you might have taken that I do not believe in FLSRs technology.)
Stock Croc: For the full 2011, First Solar GAAP earnings per share were ($0.45) but excluding warranty expenses, goodwill write-offs, and restructuring charges it earned $6.01 per share in 2011, giving the company a price to earnings ratio of about 5. For 2012, the company estimates that it will earn $3.75 - $4.25 per share for a 2012 price to earnings ratio of 7.5 while the industry and S&P 500 price to earnings ratio is 16.3 and 15, respectively.
Same about S&P comparison as above. I bet, they will not make their numbers.
Stock Croc: Most of First Solar competitors are based in China, including Suntech Power (STP), LDK Solar (LDK), and Yingli Green Energy (YGE) and only SunPower (SPWR) is based in the U.S. Chinese companies are able to borrow from their government related banks and invest in the capital intensive projects and also they have lower labor costs. Regardless, First Solar has the second highest level of sales in the amount of $2.7 billion for 2011 ahead of the sales of $2.6 billion, $2.3 billion and $2.3 billion for LDK, Yingli, and SunPower but behind Suntech sales of $3.1 billion. First Solar also has the highest price to sales ratio of 0.9 compared to a price to sales ratio of 0.2, 0.3, 0.3, and 0.5 for Suntech, LDK, Yingli, and SunPower. I believe that the premium in price to sales ratio for First Solar is that most Chinese companies cater to both commercial and retail customers, while First Solar builds high-scale wind factories that it continues to manage and operate even after they are sold.
Well, financing in China might work strange. But Europe and the US are sure also subsidizing the one or the other way. Regarding borrowing: please do not tell me the current US or European interest rates are 'market prices'.
Stock Croc: In addition to this, First Solar is the only company which uses cadmium telluride to produce its solar panels which is much cheaper. Thus it costs First Solar $0.73 to produce a watt which is the lowest rate compared to its competitors. The drawback is that its products have the lowest efficiency at around 13% compared to around 20% for the silicon based solar panels. While they take more light to produce the same electricity, First Solar panels have an advantage that they can produce electricity at lower light levels giving more stable and predictable flow of electricity, which utility companies generally prefer.
Well, this is a race of technologies. In the end, it will not even matter, what the better technology is. Just think about video tapes. In Europe, we had several systems - VHS, Video Beta, ... Once one of them crossed a critical mass, the race was decided. FSLR has to progress as fast as the rest of the field - why should 10 or 20 companies not be able to cut costs faster than a single one?
Stock Croc: The electricity produced by solar cells without including any government subsidies is still more expensive than that from on-shore wind farms or gas powered plants. First Solar is the cost leader and also has access to markets in Europe and Asia (its main manufacturing facilities are Germany and Malaysia). By focusing on solar farms with large capacities, First Solar is the most prepared of all firms to thrive on its own without these government subsidies. It is a lot more efficient to distribute the electricity from large solar power plants than from panels installed on individual buildings which most of FirstSolar's competitors currently do.
I second the first sentence - very well formulated. Given all the problems of off-shore wind power, I doubt it will ever catch up to solar. Focusing on large plants has some advantages - sure. Disadvantage is, it makes you even more dependable on politics and subsidies. I see a huge potential in the mid-scale projects. Think about the whole US - with better weather conditions as Europe on average. There you have 100s of shopping malls, production plant, office buildings. All of them with flat roofs and air conditioning. This is a huge potential, where solar energy is produced where it has to be consumed. Not grid needed - the more sun, the hotter, the more air conditioning. And: we already have grid parity in southern US regions with standard solar cells!
Stock Croc: M&A Target
On September of 2011 First Solar announced that it closed on the sale of two solar power projects one for 550 megawatts and the second for 230 megawatts. The Department of Energy backed the loans for the purchase of the two projects with guarantees for $1.46 billion and $646 million, respectively. It is not clear when the government backing of this type of loans will end but I project it will be soon, sometime in the next few years. At this point it makes sense for First Solar to be owned by a larger owner to finance its capital intensive projects which have 25 year of estimated lives. An acquirer could be a private equity firm or a large industrial conglomerate. Any take out should be at a significant premium to current prices as 60% of SunPower recently changed ownership for $1.37 billion which values the company at $2.3 billion. However, First Solar should be worth more than that as it has an earnings before interest, tax and depreciation margin of about 6% compared to a negative 17% for SunPower. Indeed, an article published at the end of 2011 on Bloomberg speculated that First Solar is a likely takeover target for a number of buyers including its current largest shareholder, the Walton family, better known in the retailing world. A reason for a deal not going through could be potential liabilities with acquiring a company which works with cadmium telluride, which is considered carcinogenic in the EU.
I doubt, any hedge fund or financial investor would pay a premium on FSLR currently. Players in the field have more than a handful of problems with their own business.
The whole sector in turmoil. Q4 2011 results have been bleak all around. Who will survive this game is unclear. Prices might have stabilized somewhat at the beginning of 2012, but might head down already in Q2 2012. Why should anybody take out a company here, at this price levels, with the chance to get them at 50 % of todays value in a few months? I do not buy this argument ... and I owe you a good bottle of wine, if you are right, Stock Croc!
Stock Croc: Conclusion
First Solar is attractively valued and is a leader in the solar power panel manufacturing. While 2011 was a rocky year, many of the company's large projects already have buyers and will come to fruition in the next several years. The worst is definitely behind and now the company should be able to reward shareholders even without government subsidies for the industry while meeting the demand for more and greener energy.
I would think, the worst is right in front of us. I would not bet on FSLR being around in 5 or 10 years and therefore would not touch this stock.
3/19/2012
Silver manipulation???
Over the weekend I did listen to a few podcasts and did read some articles on silver price development. Recently, silver dropped a lot in very short time periods. Biggest down day was the 29th of February, 2012.
My take-aways are:
- silver short-positions are held by only a few hands, biggest holding 15 to 25 % of overall short positions (thus representing a huge agglomeration on one side)
- silver long-positions are held by many hands, and here limitations on the maximum size of your holdings apply
- biggest shorties are huge investment banks, who trigger price drops using the high-frequency trading
- and those hands overall end up as net buyers on days silver drops rapidly.
To see what happened to silver on Feb, 29th check this link: The Great Silver Manipulation.
It is a strange chart with little explanation I can provide. Even if you would think some news came out that day and in this hour - would you sell such large positions if you want to get out of the market with as little loss as possible? No huge position would sell in a rush normally. They do know they would drive the price down. So why this fast and furious sell?
My take-aways are:
- silver short-positions are held by only a few hands, biggest holding 15 to 25 % of overall short positions (thus representing a huge agglomeration on one side)
- silver long-positions are held by many hands, and here limitations on the maximum size of your holdings apply
- biggest shorties are huge investment banks, who trigger price drops using the high-frequency trading
- and those hands overall end up as net buyers on days silver drops rapidly.
To see what happened to silver on Feb, 29th check this link: The Great Silver Manipulation.
It is a strange chart with little explanation I can provide. Even if you would think some news came out that day and in this hour - would you sell such large positions if you want to get out of the market with as little loss as possible? No huge position would sell in a rush normally. They do know they would drive the price down. So why this fast and furious sell?
3/11/2012
Concrete Investment
Three years ago my precious (the beautiful lady who stands next to me) convinced me to buy a flat we now own. We have been living here for a little more than 2 and a half years. For a few weeks the same developer has been advertising condominiums just 200 meters from our place. The houses do not only look pretty much the same, they more or less used the same construction plan.
Today I checked the little sales office they put up near the street and talked to the guy selling the condos. You must know this is just south of Munich, Germany. As it is only 200 m from our place, I really consider it the same neighborhood. At the moment its just an empty slot near the road - just recently a very old barn under monument protection collapsed on the space. So it is now open for new development.
What interested me most was the price development. As I mentioned - the new buildings really look the same. Energy standards are higher somewhat, as this is a legal requirement here. This will add a little to construction costs, but our condo is quite the same energy standard and has geothermic heating too. The condos on the new place have been designed smaller, so where our place has two flats on a floor, there are three at the new place. This also means downsides on the floor plans of the new condos - even smaller kitchens, bathrooms without window, ...
In general I would say the old and the new place are the same standard: higher energy efficiency vs. smaller condos (both of them maybe tiny to US standards ...). But the price difference really did surprise me. The condos in our house sold for 3.200 to 3.900 EUR a square meter - depending on size, floor, etc. This calculation is done without parking slots (inside or outside) and without taking rooms in the basement into account. The new condos (on comparable calculation) sell for 4.000 to 4.500 EUR a square meter. With construction not even started and condos ready to move in at the end of 2012 earliest, already 50 % of the 28 condos are reserved (which requires a fee to be paid). So the prices are not unrealistic.
So the market changed a lot. We bought our flat after we walked through the rooms, talked to the construction manger, brought in the family, got a list of questions from my cousin - an architect - answered. The new project will most likely be sold before the first wall is even constructed.
That's the time to send a kiss to my precious - maybe she is wiser than I ever will be.
This also shows how weird the market got by now in Munich. On Saturday - visiting the Munich Börsentag - Dr. Jens Erhardt stated that returns by renting out condos in Munich might now be rather 2 % than 5 %. Historic price levels of 13 times yearly rental income to buy a house or a condo are totally out of reach - today its more like 20 to 30 times. I am afraid this market distortion by cheap money, uncertain outlooks and flight to concrete is not a Munich only phenomenon.
Today I checked the little sales office they put up near the street and talked to the guy selling the condos. You must know this is just south of Munich, Germany. As it is only 200 m from our place, I really consider it the same neighborhood. At the moment its just an empty slot near the road - just recently a very old barn under monument protection collapsed on the space. So it is now open for new development.
What interested me most was the price development. As I mentioned - the new buildings really look the same. Energy standards are higher somewhat, as this is a legal requirement here. This will add a little to construction costs, but our condo is quite the same energy standard and has geothermic heating too. The condos on the new place have been designed smaller, so where our place has two flats on a floor, there are three at the new place. This also means downsides on the floor plans of the new condos - even smaller kitchens, bathrooms without window, ...
In general I would say the old and the new place are the same standard: higher energy efficiency vs. smaller condos (both of them maybe tiny to US standards ...). But the price difference really did surprise me. The condos in our house sold for 3.200 to 3.900 EUR a square meter - depending on size, floor, etc. This calculation is done without parking slots (inside or outside) and without taking rooms in the basement into account. The new condos (on comparable calculation) sell for 4.000 to 4.500 EUR a square meter. With construction not even started and condos ready to move in at the end of 2012 earliest, already 50 % of the 28 condos are reserved (which requires a fee to be paid). So the prices are not unrealistic.
So the market changed a lot. We bought our flat after we walked through the rooms, talked to the construction manger, brought in the family, got a list of questions from my cousin - an architect - answered. The new project will most likely be sold before the first wall is even constructed.
That's the time to send a kiss to my precious - maybe she is wiser than I ever will be.
This also shows how weird the market got by now in Munich. On Saturday - visiting the Munich Börsentag - Dr. Jens Erhardt stated that returns by renting out condos in Munich might now be rather 2 % than 5 %. Historic price levels of 13 times yearly rental income to buy a house or a condo are totally out of reach - today its more like 20 to 30 times. I am afraid this market distortion by cheap money, uncertain outlooks and flight to concrete is not a Munich only phenomenon.
3/05/2012
Ebay and precious metalls
During the last weeks I took a look on the trades for precious metalls on ebay.de. Compared to proaurum.de you can see no price advantage at single coin level. Actually all the auctions end at spot price level; and than you have to add transport costs and a little more risk, as you deal with a private person.
Picture changes when you trade lots of 50 or 100 silver coins. There you can get a discount - not huge but maybe 5 per cent.
What you really should look at is: trade only known coins like Eagles, Marple Leafs or Philharmoniker. There is lot of stuff on ebay, that is not really silver or gold, but only with a shiny topping. Its not a scam, because when you carefully read the fine print the precious metal content is stated. But its cumbersome to figure out what is real silver or gold, and what is only a shiny mint with little value. Stay with what you know - it's hard enough to get a good price on those.
Picture changes when you trade lots of 50 or 100 silver coins. There you can get a discount - not huge but maybe 5 per cent.
What you really should look at is: trade only known coins like Eagles, Marple Leafs or Philharmoniker. There is lot of stuff on ebay, that is not really silver or gold, but only with a shiny topping. Its not a scam, because when you carefully read the fine print the precious metal content is stated. But its cumbersome to figure out what is real silver or gold, and what is only a shiny mint with little value. Stay with what you know - it's hard enough to get a good price on those.
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