How hot is too hot? First Solar’s star status gets another boost

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Times staff writer Edward Silver, who keeps a close eye on green investing trends, filed this report on solar-module maker First Solar Inc.’s earnings report today:

First Solar thinks different, and that’s why its stock is in a class by itself in the renewable-energy field. Though it’s a young company in an emerging industry, it has become a profit machine, a status burnished by its first-quarter results.

Today it reported earnings of 57 cents a share, outdoing consensus estimates by a dime. Revenue of $196.9 million was triple the year-earlier sum. Taking the new numbers into account, analyst John Hardy of American Technology Research believes First Solar is likely to earn $2.82 a share this year.

With the stock around $300 -- it closed at $291.99 but spiked to $307.80 in early trading -- that still implies a rich price-to-earnings ratio. But the equation loses its outlandish tinge when you consider that First Solar is building plants fast to satisfy demand that may swell next year’s profit up to $7 a share.

First Solar is living large on ‘thin film,’ a next-generation method that accounts for perhaps 10% of the industry’s installations. Silicon-based cells claim the rest. Thin-film products are flexible, lighter and above all, dodge the inflated price of silicon, which has been on a tear. But the standard material converts sunlight into energy more efficiently, and the intricacies of thin-film chemistry and manufacturing have been known to hamper companies trying to get off the ground.

Even within the thin-film brigade, however, First Solar goes it alone. Its formula relies on tellurium, one of the rarest elements on the planet. Long-term supply is secure, the firm says, and all else seems to be going right too. Its much-admired manufacturing is said to be so cost-effective that some see it leading the charge to bring solar into coal’s price range. That’s a goal dear to the hearts of both environmentalists and investors.

Enough background? Here’s what’s new. The company is headquartered in Phoenix but its business is anchored in Europe. On today’s conference call with analysts, however, CEO Michael Ahearn spoke of a high sense of urgency among U.S. utilities to meet their renewable-energy mandates. Already, First Solar is developing a 7.5-megawatt pilot project with Southern California Edison. Look homeward, Ahearn?

Hardy, the analyst, calls First Solar the most capable provider for utility-scale projects. Starting in the latter half of 2009, ‘We see the U.S. utility market as the primary driver of demand, based on the fact, of course, that the U.S. consumes so much of the world’s electricity.’

The question is, are the blue skies already priced into the company’s $23-billion valuation? First Solar investors know they own a volatile stock, one that has almost doubled from its February depths of $165.60. Wall Street pays well for speedy growth, but at these heights the risks are magnified.

A few to keep in mind: What if silicon prices slide as supply rises, and potential thin-film customers begin to think different about their choice? What if First Solar’s suppliers can’t mine enough tellurium to feed its expanding appetite? And as it becomes known as a stock that must be owned, will there soon be anyone who doesn’t?

Posted April 30, 2008