First Solar (FSLR) has jumped 5% following yesterday’s 9% loss as the likelihood of a Democrat-controlled US Senate looms, further improving the outlook for renewable energy stocks.
With one Georgia senate seat already called for the Democrats and a second looking highly likely to be captured by president-elect Joe Biden’s party, equity markets are repositioning accordingly.
Solar panels maker First Solar has recovered reasonably strongly since the March 2020 meltdown in markets. However, the gains have been nowhere near as striking as those seen among other renewable energy stock plays, notably in the electric vehicle (EV) segment.
First Solar was up 77% last year but that compares to 740% for Elon Musk’s Tesla and an even more eye-watering 1,100% for China’s NIO EV automaker.
Goldman sours on First Solar
The reason for the sharp decline in First Solar’s share price yesterday was the downgrade from Goldman Sachs, which it is worth digging into.
Goldman sees earnings per share (EPS) declining by 17% this coming year, with 2020 representing “peak” EPS for the company.
By way of contrast, the investment bank’s brokerage arm thinks its peers will grow EPS by 20-30% in coming years.
Part of the explanation for that is pressure on the selling prices for its modules due to the expiration of Section 201 solar tariffs, with further pressure on prices coming from increased module supply across the industry.
Goldman sees better mileage for returns from First Solar competitors such as Enphase Energy, which it has upgraded to a buy. Meanwhile, it has cut the price target for First Solar by 20% on Monday’s closing price, to $81.
We think Goldman has got that all wrong – here’s why.
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Election game changer
The election results from Georgia have changed the price dynamics for the alternative energy complex.
Since Biden’s presidential election victory renewables have pumped higher, with Invesco Solar ETF (TAN) returning 234% by year’s end – further highlighting the laggardly nature of First Solar’s performance of late.
But we think that First Solar has some catching up to do and the new certainties flowing from the Democrats taking control of the three branches of the US government will lift all boats in the renewables sector.
In addition, the output cut by the Saudis and the expected second-half recovery in the global economy, could see a sustained rise in crude oil prices. A higher oil price improves the competitive position of solar energy for energy users.
JP Morgan agrees with us. It raised its price target for First Solar from $101 to $105 on 23 December, on the basis of the passing of a stimulus bill by Congress and increased solar installation demand from China, which won’t be met by home-based manufacturers alone.
It should also be noted that First Solar doesn’t just manufacture the photovoltaic (PV) modules, but also the solar power systems which use them. It also has a third leg to its operations in the form of the operations and maintenance services it provides to end users of these power systems.
Green economic nationalism to light-up First Solar
There’s another important factor weighing in First Solar’s favour and that is the fact that it is the largest manufacturer in the US.
The top four solar panel makers are all located in China (JinkoSolar, JA Solar, Trina Solar and LONGi Solar). In fifth place is Canada’s Canadian Solar and in 10th position is First Solar.
As the top US maker we expect the Democrats to encourage orders originating in the US to be funnelled its way – economic nationalism isn’t just a Trump thing.
Add to that the momentum behind the environmental, social and governance (ESG) investment theme and it provides further ballast for solar stocks.
First Solar Q4 2020 results are due on 18 February, so we will get a better handle at that point on how sales are going and whether it looks like Goldman will be right about weaker-than-expected EPS growth.
Those that buy now looking for short-term trading profits might consider selling before the results, while investors taking a somewhat longer view should hold through any disturbance with an eye on the bigger picture outlined above.
But the ultimate determinant on EPS will come from the expiration of tariff protection as Goldman correctly intimates, but that’s not due to happen until 2022 – plenty of time for the Biden administration to mull an extension or other measures to bolster US-based manufacturers. The tariff regime was introduced by President Trump in 2018.
The 12-month rolling forecast P/E for First Solar is 25.8 according to Stockopedia, while on operating margin it is ranked 10th out of 31 companies in the renewable energy market, meaning that of its peers it is among the more likely to see sales revenues fall through to the bottom line, so that’s another reason not to be so pessimistic about EPS.
First Solar registered its all-time high at 302 on 12 May 2008 and is currently priced at $97, up 5.3% at the time of writing.
First Solar is sitting nicely above the Ichimoku clouds (see chart above), other than in September and October, indicating firming support at current price levels and into the near future.
This stock is a buy.
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