We have out first reader question, and I mean ever. This is not a call in blog. (Just kidding. I’m happy to answer your questions. Use the contact me tab at the top of the page.) This one is about solar stocks.
Hey Nelson, been reading your blog for a long time and like your take
on small cap stocks. I’ve been looking a various solar companies to
bank on the long term transition. I was wondering if you had any
recommendations or analysis. Canadian solar has been taking a beating
this month. I was also looking at 5N Plus who is a manufacturer that
has a contract with First Solar till 2017. What do you think?
Let’s look at 5N Plus (TSX: VNP) first, since it seems the most interesting. Here’s a 10 year chart.
Well. That’s the kind of chart that’ll get a contrarian investor interested.
5N Plus manufacturers speciality metal and chemical products. These metals are used in the manufacture of pharmaceutical, industrial, and electronic products. We’re especially interested in one use, solar panels.
The contract referred to with First Solar was first signed in 2011, and will remain in effect until the end of 2015. First Solar has signed additional contracts with 5N Plus to extend the agreement until 2017. The renewal of the contract was probably good, since normally you don’t enter into new contracts with a company that dissatisfies you.
The company has what it refers to an a “dominant” position in the bismuth market, which I assure you is a real thing. Moats are good.
The CEO also owns more than 17% of the company. We like insider ownership. If I’m a shareholder, I want the CEO’s interests to be the same as mine. The CFO owns 1,700 shares. Of a $4.80 stock. He’s not really on board.
5N Plus has made 18 cents per share over the last 4 quarters (excluding items), putting it at over 20x earnings. That was the company’s most successful year ever, even though revenue fell almost 20% year over year. The balance sheet is improving, as debt has fallen from $148 million to $83 million over the last year. Book value is $2.27 per share, less than half the current stock price of $4.87.
From what I could find online, it looks like about 15% of 5N’s revenues were to First Solar. That doesn’t even make 5N that levered to growth in solar. Sure, it’ll help, but the majority of the business is to a large base of customers. Depending on your opinion on solar in the future, that’s either good or bad.
So about 5N… meh. I wouldn’t put any money into the company. I can’t see how it’s undervalued in the traditional way.
Okay, how about First Solar (NASDAQ: FSLR) and Canadian Solar (NASDAQ: CSIQ)? Let’s look at First Solar first.
On first glance, First Solar seems decent. It trades at a P/E of just 15x if you strip out the extraordinary items. It made more than $7 a share back in 2010. Not that we care what analysts think, but earnings estimates are $2.49 for this year and $4.63 for next year. Big companies like Walmart have pledged to use a lot of solar power over the next number of years, and more and more people are choosing to use solar power to screw over the power company by installing their own systems. I see the growth potential.
First Solar also has a rock solid balance sheet. Total cash is $1.76 billion while total debt is a paltry $220 million (but with more than $900 million of “other liabilities,” which I suspect is just some off balance sheet debt). Still, the company has plenty of cash, and a book value of more than $45 per share. It’s a $70 stock, and is actually profitable.
Canadian Solar isn’t nearly as good in most every category. The balance sheet is worse, it trades at more than a 50x P/E, and book value is about a quarter of the current share price. First Solar is also down quite a bit from its all time high, while Canadian Solar is still close to an all time high, even after selling off over the past couple of months.
If I was putting money to work in this space, the answer to me is obviously First Solar. It’s the cheapest, has a bunch of cash, and is pretty profitable. It’s more investment than speculation, unlike Canadian Solar. 5N isn’t a pure play on solar, but that could be good if the Chinese start kicking ass in the space.