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First Solar May Be the Most Undervalued Stock in the S&P 500

Fslr Guidance P

While the market has done well this year, not every stock had a great 2016. It's no secret that it has been a rough year for the solar industry, for example. Not even industry leaders such as First Solar, Inc. (NASDAQ: FSLR) have been immune to the carnage. The stock, which traded over $70 early in the year, has fallen as much as 60% over the past six months because of industry headwinds and company-related issues.

While a pullback was warranted, investors have been overly pessimistic and are overlooking First Solar's exceptional balance sheet. In fact, the company is currently one the S&P 500's cheapest on a price-to-book value basis. This, combined with the company's solid historical operating performance, should deliver strong returns for patient investors.

Fslr Guidance P

Image source: First Solar 2017

guidance call presentation

A sunnier long-term outlook

The prevailing view by investors is that 2017 will be a challenging year for the solar industry, due in large part to policy changes in China and the new US administration. While its certainly true that supply has overwhelmed demand recently, leading to a 30% year-over-year drop in module prices, the long term demand projections for solar are excellent, They also continue to be revised upwards, in part due to the increased demand that comes from lower prices.

Demandmonitor

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GTM Research

In their Q4 2016 report, GTM's research team projects worldwide demand to drop by about 7% in 2017, but sees annual total installations growing at an average 12% rate over the next 5 years. Expect these projections to be revised upwards over time. The 2021 estimate alone was increased by 4GW since the Q3 2016 report.

A rock-solid balance sheet

While most solar companies have financed their growth via debt, First Solar's long-term leading position in the space has allowed it to more consistently generate a profit. This advantage has allowed the company to build up a massive balance sheet, anchored by a net cash balance of around $1.5 billion (over $14 per share). The company's total equity was over $5.9 billion at the end of the third quarter, worth over $57 per share. This figure will come down because of the asset impairments First Solar is taking, but the resulting amount should still remain over $5 billion, or $50 per share.

FSLR Book Value (Quarterly) data by YCharts

In many cases, the balance sheets of manufacturing companies are loaded with plant, property, and equipment-related assets. These assets can very easily require massive impairments because of obsolescence, which can limit the safety of a low book-to-value ratio. In contrast, most of First Solar's balance sheet resides in cash, investments, and projects under development. These assets have a much lower risk of impairment.

Investor takeaway

With the current market cap well below the equity book value, investors are either expecting the company to require further large asset impairments in the future or are simply being overly pessimistic. Given the company's leading position in the fast-growing solar industry and their asset composition, this Fool believes that investors will soon realize their error in judgement and buy back in.

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awindenberger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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