Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies to Research for the Defensive Investor – October 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how First Solar Inc. (FSLR) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): First Solar, Inc. manufactures and sells photovoltaic (PV) solar modules with an advanced thin-film semiconductor technology, and it designs, constructs, and sells PV solar power systems. The Company is a thin-film PV solar module manufacturer and a PV solar module manufacturer. It operates its business in two segments: components segment and systems segment. Its components segment involves the design, manufacture, and sale of solar modules, which convert sunlight into electricity. Its systems business involves the sale of its solar modules coupled with the engineering, procurement and construction of the solar PV power plant. In September 2013, First Solar, Inc and K Road Power Holdings LLC announced that First Solar acquired from K Road the 250 megawatt (MW)AC photovoltaic Moapa Solar Project in Nevada.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$27.87|
|Value Based on 0% Growth||$16.34|
|Market Implied Growth Rate||10.60%|
|Net Current Asset Value (NCAV)||$12.04|
Balance Sheet – June 2014
Earnings Per Share
Earnings Per Share – ModernGraham
First Solar does not pay a dividend.
First Solar does not satisfy either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the lack of dividend payments, the lack of earnings stability over the last ten years, and the high PEmg ratio. The Enterprising Investor has concerns with the lack of dividend payments and the lack of earnings stability or growth over the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time. From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $5.69 in 2010 to only an estimated $1.92 for 2014. This demonstrated lack of growth does not support the market’s implied estimate of 10.6% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on First Solar Inc. (FSLR)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in First Solar Inc. (FSLR) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.