Misery, First Solar (FSLR), Invert

Johnson spoke well when he said that life is hard enough to swallow without squeezing in the bitter rind of resentment.  Charlie Munger

“Invert, always invert,” Jacobi said. He knew that it is in the nature of things that many hard problems are best solved when they are addressed backward. –Charlie Munger

How to Guarantee Misery in Your Life

Below are tips from the great and the not-so-great on how to guarantee misery and second-rate achievement in your life.

Johnny Carson says,

  1. Ingesting chemicals in an effort to alter mood or perception;
  2. Envy, and
  3. Resentment.

John Chew pleads: Meet my Ex.    http://www.youtube.com/watch?v=i5OlolbLXvw.    Not to be watched if squeamish.

Charlie Munger intones:

  1. Be unreliable. Do not faithfully do what you have engaged to do.
  2. Learn everything you possibly can from your own experience, minimizing what you learn vicariously from the good and bad experience of others, living and dead.
  3. Go down and stay down when you get your first, second, or third severe reverse in the battle of life.
  4. Avoid thinking creatively about problems. Never invert.

First Solar

Now to put our lessons to the test…

I read the news this morning…Oh boy. –The Beatles.

This morning I read a Bloomberg story discussing First Solar’s attractive valuation following its recent selloff.  Also analysts have rekindled takeover chatter. “First Solar is still profitable,” a Kaufman analyst explains. “So you are buying the best in the industry at a discount price. Certainly for both GE and Siemens (SI), it would diversify their energy platform.” FSLR trades at 60% of book value and 5 or 6 times trailing earnings.

If the Kaufman analyst said that to me, this is exactly how I would respond. http://www.youtube.com/watch?v=6eXFxttxeaA

Why?  What is the strategic thinking you would need to do before considering this as an investment?

How could you have avoided this house of pain before the price drop?

 

http://ycharts.com/:

Subsidy Orgy Ending, First Solar’s Hangover is Just Beginning By Jeff Bailey

Ever been to a sporting event where, during a break in the action, they wheel out that clear booth, stick some poor sucker from the crowd inside, and cash is blown into the enclosure for a brief period of shameless money-grabbing?

The global boom in government subsidies to the solar panel industry went something like that, and one can see the brief and frenzied joy of that period in First Solar’s (FSLR) up-and-down stock chart, with today’s price a steep 90% or so below the peak.

The good times were good. Malaysia was handing out huge tax holidays for manufacturers, so First Solar built plants there. Germany seemed intent on covering every roof with solar panels, paid for in part by government subsidy, so First Solar sales were huge there. And not to be left out, the U.S., during its giddy economic stimulus days, offered cash grants for solar installations. Party on.

But, as with past alternative-energy orgies, the good times must come to an end. Goodbye to First Solar’s market cap of $20 billion. Jimmy Carter’s Public Utility Regulatory Policies Act of 1978, known as PURPA, led to tens of billions of dollars of alternative energy projects, including some early and costly solar. But paying above-market electricity rates to subsidize the projects became so costly that PURPA was eventually curtailed.

Poor politicians can’t help themselves. They love stuff like solar and wind, which generate manufacturing and construction jobs and makes everyone involved seem so with it. More efficient energy projects – like ones that reduce consumption – are by comparison so boring, even if they make more sense.

Last week, in announcing reduced earnings projections for 2011 and 2012, First Solar’s CEO Mike Ahearn said, “we are recalibrating our business to focus on building and serving sustainable markets rather than pursuing subsidized markets.” Investors can count on thinner margins and all the hassles and expenses that go with building and operating huge energy projects. And solar remains a relatively expensive way to make power. Unless the brent crude oil price chart goes to $200 a barrel.

In the meantime, the stock is bound to look super cheap by some measures. A trailing PE of 5, of course, suggests some big adjustments ahead to the E.

But it won’t be until 2014, Ahearn said in a statement, that First Solar’s will “earn substantially all” of its revenues from non-subsidized markets. So the results until then are nothing to make long-term bets on. The last of the party is still winding down. End.

Thoughts on First Solar and Competitive Advantage

OK, I am not saying First Solar is not a buy at any price, but what did the Wall Street “analysts” not analyze.

Studying competitive advantage will help us as much in avoiding a house of pain as in finding profitable investments.

6 responses to “Misery, First Solar (FSLR), Invert

  1. Whenever the subject of alternative energy comes up, I always think “Rain Main”. Filmed in 1988, there’s a scene where Cruise and Hoffman walk past a field with spinning turbines in them. They weren’t economically viable then, and they aren’t economically viable now.

    Someone said a very smart thing about alternative energy recently: if it were any good, it wouldn’t need government cash.

    The timing of your article is particularly apt for Britain, too: “UK solar in limbo after court ruling- Britons who wish to install solar panels this Christmas are left wondering about how much money they will receive in state subsidies after the High Court Wednesday decided the government had acted unlawfully in its rate-setting process.” http://reut.rs/uCy5Fu

    I find this analyst statement puzzling: “Eventually it probably makes sense for them to be part of a larger company.”

    Why? Come the happy day that I was making a bundle out of the cadmium-telluride panels, why would I want to be part of a larger company?

    “Acquiring First Solar at the bottom of the market would be a very smart move for a number of large industrial companies.”

    I could well have analysed this wrong, but who’s to say where the bottom of the market is? Who’s to say this all wont die a natural, like pet rocks and beenie babies? I guess it’s possible that someone sees some merit in their assets, though.

    • First Solar may not be the poster child for a perfect short or a company to avoid but it is pretty close.

      First, the company is selling a commodity good without being the lowest cost producer (Chinese Solar Manufacturers were undercutting them)
      Second, the demand curve is artificially pushed up and to the left by a subsidy from the government. And get this–I hope you are sitting down–the politicians give the money not to the best producer, most efficient, but to the ones that will provide the most political benefit, perhaps an inefficient company that will employ many people. You have reverse Darwinism in effect. The weak thrive. The politically connected not the consumer oriented benefit.

      Fighting economic law is not the way to peace and prosperity for investors. With “cleaner” types of energy like natural gas providing much more energy per unit cost then it is only a matter of time before the edifce caves in. When the taxpayers revolt then the ENTIRE demand curve shifts to the right (Prices plummet). Now you have crippled dinosaurs in a tar pit.

      So the key is what is the necessary capacity needed to earn a fair return on capital?. The capacity built up to serve the subsidized demand (govt. subsidies) must be removed/restructured/shifted to a higher economic use. So the book value number is silly–you need liquidation or replacement cost in a normalized industry not historical costs. Remember Buffett PAYING to have his textile looms removed? You need to figure out the capacity necessary to fulfil the needs of an unsubsidized market.

      The solar industry will continue but under a vastly different capacity structure. The housing crisis was a tutorial on overcapacity (overbuilding) and we have had 6 to 7 years of restructuring. Production changes take time (Austrian economics). Consolidation/rationalization makes sense because high cost/inefficient production capacity needs to be removed first. But I doulbt the analyst has done the work to determine what is a normalized market for solar panels. He would still be whupped upside the head for the ARROGANCE of PRESUMING to know the market was at a bottom. Another stupidity would have gotten him a date with my Ex.

      I am not saying First Solar will never be a good investment, but you do need to think things through properly. Saying it is “cheap” on past metric is nonsensical–Like Millerfegg Mason saying Homebuilders were cheap at 6 times earnings in 2005! I would rather invest in these guys than Wall Street because at least there is a CHANCE to make something.

      http://www.youtube.com/watch?v=FrFJQ0iGzw0

      A- for your report. You would have gotten an A except you dissed Beenie Babies. I stood in line for one.

  2. I read a post from John at Bronte Capital’s blog about why they shorted First Solar. A question an investor would need to answer is whether or not First Solar’s thin film technology will be better than traditional wafer technology solar firms. Even if the industry is economically viable I would expect poor results from First Solar if the cost/watt for their technology is not competitive.

    http://brontecapital.blogspot.com/2011/10/shorting-early-can-be-wrong-first-solar.html

  3. Hi John, I haven’t been on for a while so backtracking through your posts to catch up.

    While I never invested in First Solar, I did make an extremely idiotic investment decision in one of its Chinese competitors and I distinctly recall FSLR’s meteoric rise in 2007. At the time, its main attractiveness over its Chinese competitors was its cheaper thin film technology and the fact that it was an American firm and thus not perceived to have any accounting issues. Either of these factors justified a PE of 400x+. Just as Greenwald mentions in his book, supply advantages, including government subsidies, are ephemeral and weak at best. Without this temporary gain, all these solar firms had basically 0 competitive advantages.

    For example, attempts at building large plants to make polysilicon ingots in an effort to raise fixed costs as a % of total costs (with the goal of creating a higher barrier to entry) completely backfired when polysilicon prices plummeted.

    I think Charlie Munger is right in suggesting that the solar industry will be a huge industry in the future but picking a winner now is very difficult. Even if it does grow into a large industry, the sun is an equal-opportunity resource so I can’t foresee it being a profitable industry by any stretch of the imagination.

  4. Dear llmarsii:

    Good points. Often it is easier to spot the losers rather than the winners. Take the canal companies when the railroad companies began. Or… Kodak with digital photography. I still am amazed that the price of Kodak began underperforming around 1979–when digital photography first was invented. A THIRTY year relentless decline. You may not have been a short seller but you could have hedged part of your portfolio with a perpetual weakling.

    “Clean” energy is another trap, in my opinion, for tthe unwary.

    • “I still am amazed that the price of Kodak began underperforming around 1979–when digital photography first was invented. A THIRTY year relentless decline.”

      I think there’s some hindsight bias here, though. Nobody was really talking about digital photography back then, as far as I’m aware. When I left my job in 1990, I was given a rather handsome camera. It was a regular camera, not digitial, though. I don’t recall even having heard of digital cameras back then.

      I think digital cameras reached a tipping point within the last decade, when their cost reduced to such a point that conventional cameras no longer made sense. That’s when digital cameras really went mainstream.The same thing happened with computer screens: CRTs versus LCDs.CRTs were cheaper, and ongoing R&D meant that their prices got even cheaper still. But there was a tipping point where CRTs no longer made any sense, even for those on a budget.You can also make bigger LCDs now than you could possibly sensibly make with a CRT.

      My own opinion is to watch out for SSDs (Solid State Devices), as opposed to Hard Drives. SSDs are smaller, faster, and more robust. They are hideously more expensive – at the moment – but my theory is that we’ll see a similar pattern as we saw for LCDs versus CRTs, or digital cameras versus analogue. SSDs are already making much headway – in smartphones and high-end laptops – for example, and I figure it’s only a question of time before hard drives are considered obsolete. May take another decade, though. My company even gives away SSD sticks (most people call them USB pen or flash drives) as promotonal gifts. Capacity is improving all the time.

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