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Holly LaFon
Holly LaFon
Articles (8165) 

Why Would Brian Rogers Double His Holding of the Worst Performing Stock in the S&P, First Solar?

April 27, 2012 | About:

First Solar (NASDAQ: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, manager of $500 billion at T Rowe Price Asset Management, doubled his stake in the stock in the first quarter. Amid all the problems plaguing the solar industry, why would anyone choose this stock?

Tempe, Ariz.-based First Solar is the world’s largest maker of thin-film solar panels. It began 2011 at $133 per share but steadily declined to $33 per share by year 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.

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.

FSLR pe Interactive Chart

Several notable value investors bought shares beginning in 2011 when the P/E 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 revenues 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 outlines 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 P/E 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.

See Brian Rogers’ portfolio here.

Rating: 3.2/5 (13 votes)


Jean-Francois Nobert
Jean-Francois Nobert - 5 years ago    Report SPAM
I study this title a little,when i bought the stock couple weeks ago i rapidly realise i made a mistake doing it, even at a low current PE and a low price to book it's stil a risky invesment.

-First it need subsidize money to be a profitable business, because as we speek it still much more expensive to produce electricty with solar pannel than other type of like Coal, Gas and Oil. So i don't see it as a realy business like the other that compete without subsidize money.

-Second, the major project are finance by governement, Germany, USA, etc, so with the current economic with the level of debt i could be wrong but i'm not sure they will go with the greener if they have choice, they could go with the more efficient way to spend it.

-Third, First Solar is currently having some competitive advantage versus other, they are among the bigger and they are among the cheaper producer. Althought in this kind of business you never know what the competition is working on, their could be s big comapnyr like Samsung, GE or other who have a way to produce it at a realy cheaper price. If they start their plant the cost per wath could drop by a lot. So the competitive advantage is not like cokeor a railway company, you never know who could find a cheeper way to produce it. In the last two decade the cost of solar pannel drop by a lot

Four, it's realy hard to value the business, even at a low price to tangible book, the inventory and the plant could be worltless fast if a conpetitor have a way to produce the solar pannel for half the price.

Valuing the business base on the price to tangible book....

As a little conclusion i'll tell you a little story that i've exeprience with solar energy. A couple year ago we built a realy nice Solar Car at the university of ETS Montteal, around 900 000$ in gross material, wish account for:

-750K$ of solar pannel of 28% Efficiency Space grade cells by EMCORE same cell use for satellite

-50K$ of battery By ELECTROVAYA, same battery use on pathfinder robot for plannet Mars exploration.

-50K of aerospace grade alluminum 7475, by BOMBARDIER use for plane.

-20k of carbone fiber by BOMBARDIER for plane too.

-and around 30K of other part, eletoctronic,, motor etc.

So arround 900 000$ in gross material. Few year latter, University try to get sell the car because they have better car for competition, and the car is not competitive with the new car of other university. Museum already have some and don't want a new one, solar cells loose their property with time, battery are useless and aluminum and carbon fiber can hardly be recylcle because it's all custom made part, so the car was sold for 200$ to a friend.

So on my side i'll only buy the stock of solar solar if it's not trading at lower price than cash value. Else i think the business it currently carrying to much risk especially with the current economic.

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