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First Solar Is A Relatively Undervalued Stock With More Downside To Come

Summary

Comparative analysis shows that First Solar has a strong balance sheet, management and valuation.

Intrinsic value shows a range from $35.74 to $93.07 while $56 being my target price. FSLR now trades at $37.53 at time of writing.

Based on technical analysis, there’s downside momentum but investors can start accumulating.

Undervalued stock with more downside. Investors can buy the stock depending on the margin of safety required.

In this write up, I'll be discussing where First Solar (NASDAQ:FSLR) stands among its peers. Secondly, I'll be using different models from Benjamin Graham's EPS model, Graham's Number and Discounted Cash Flow model to determine value. Lastly, a quick look at FSLR's chart will be done to estimate the best price to enter as there is a strong downside momentum.

The main principle in my investing methodology is to ensure that the current profitability of the company along with its balance sheet is in line with the current price. No attempt to forecast or project earnings or cash flow is done. The reason for doing so is highlighted below in part 2.

Part 1: Comparative analysis

One method to get context when evaluating a company based on multiples is to compare a company against its competitors that has similar business models and market capitalization. FSLR's competitors are chosen from Morningstar.

The stocks are SunPower Corporation (NASDAQ:SPWR), Hanwha Q CELLS Co., Ltd. (NASDAQ:HQCL), Trina Solar Limited (NYSE:TSL), Canadian Solar Inc. (NASDAQ:CSIQ), SolarEdge Technologies, Inc.(NASDAQ:SEDG), Sunrun Inc. (NASDAQ:RUN), Vivint Solar, Inc. (NYSE:VSLR), Sunworks, Inc. (NASDAQ:SUNW) and for the sake of discussion, SolarCity Corporation (NASDAQ:SCTY).

The key statistics used for comparison has been taken from Yahoo Finance, Return on Invested Capital and Weighted Average Cost of Capital is taken from Guru Focus.

Data from Yahoo Finance retrieved on Aug. 30, 2016

Next, I'll begin to use a set of criteria that I have created to screen for stocks. The screener is actually a mix of criteria from Benjamin Graham, James O' Shaughnessy and Kenneth Fisher. Guiding principles in observing ROIC and WACC is taken from McKinsey. I found moderate success with it and hence would like to share with the world. Here's how it goes:

  1. First, P/E ratio must be below 25 while 10-16 will be observed carefully. P/E below 10 is more ideal for me. I do not wish to be too stringent to eliminate excellent stocks at fair prices.
  2. P/S ratio must be below 1.5 to be selected. A P/S above 6 will be sold.
  3. I'm not a fan of forward P/E and PEG ratio. Based on the Intelligent Investor, Benjamin Graham discourages forecasting as it contains too much uncertainty. Also, one is likely to forecast wrongly and lead to a disastrous conclusion of the stock's intrinsic value. Therefore to avoid making errors related to assumptions I would prefer to stick to observing the stock price relative to its historical earnings and balance sheet. However, absurd PEG ratios such as a negative PEG or a large PEG ratio will be seen as a red flag and the stock will be observed under scrutiny.
  4. P/B ratio ideally should be lower the better. It's best if it is below 1.
  5. EV/Revenue and EV/EBITDA ideally should be lower the better.
  6. Profit margin, Operating margin, ROA and ROE should be higher the better. Negatives are eliminated.
  7. Price/Cash should be as high as possible.
  8. Debt should be as low as possible but I would observe it relatively to price and equity. A substantial amount of debt is alright as long as the company is keeping it in control.
  9. Positive cash flow and net income.
  10. ROIC the higher the better. Also, WACC must be lower than ROIC. No negative ROIC.

After sweeping through the list, here are the stocks that are eliminated and their reasons:

Eliminated stocks

Reason for elimination

SPWR

Negative earnings and cash flow. Negative ROIC as well.

CSIQ

WACC is higher than ROIC

RUN

Negative operating profits and return of assets

VSLR

Negative profit and operating margin as well as return on assets

SCTY

Negative earnings and Cash flow

TSL

Negative Cash flow

SUNW

Negative Cash Flow

SEDG

Negative Cash Flow

HQCL

Negative Cash Flow

Click to enlarge

FSLR is the only company left after filtering. Let's take an in-depth look at the company and compare it against the criteria listed above.

From FSLR business summary:

We are a leading global provider of comprehensive photovoltaic ("PV") solar energy solutions. We design, manufacture, and sell PV solar modules with an advanced thin-film semiconductor technology and also develop, design, construct, and sell PV solar power systems that primarily use the...


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