Recently, I began to search for a strong solar energy company. There is no doubt that eventually the demand for alternative energy will create a paradigm shift in the way energy is purchased throughout the world. Energy will always be needed. Just like any company, the questions remain the same. Which companies have sustainable business models? Which companies are going to grow? Which companies are managed properly?
After reaching the financials of the 2012 FSLR annual report, it became very clear to me that FSLR is not a company I would want to invest in. Early in the AR the company touts its advancements in R&D, efficiency, and other technological innovations. Despite this, and a very long list of risk factors, I was alarmed.
First and foremost, FSLR's customers rely on bank loans to find financing for solar panels. As rates continue to rise, this will impact the sales of FSLR. But, this may not hurt FSLR as much as other solar companies as FSLR primarily sells to project developers which resell to end users. More alarming than a decline in sales is the unique risk to all solar companies: competitors, according to the AR, may be able to obtain sovereign capital, enabling competitors to operate at minimal or negative margins for an extended period of time. This debacle is a huge problem for investors in the solar industry, and underscores just how integrated politics and finance truly are.
Just to touch on an accounting issue of FSLR, long-term asset impairment, in my opinion should be listed as a risk factor. According to FSLR, "For long-lived assets, when impairment indicators are present, we compare undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to, determine if the asset group is recoverable." Putting the accounting jargon aside, essentially what will happen is that the market value of the panels will drop when technology advances. The panels will no longer have as much value, and the company will have to take a hit on its income statement. Solar technology will advance and will have an impact on its market value of installed panels compared to expected cash flow.
In the company's defense, it has been able to produce improving results in 2013. Although the results are promising, you have to question their validity and transparency. The CEO of First Solar is none other than James Hughes, the former COO of Enron. There is no doubt in my mind that Mr. Hughes has a complete understanding of First Solar and the industry experience to make First Solar a leader in the industry. But, personally, I don't believe FSLR is the strongest company in the industry. I don't have enough faith in Mr. Hughes to bring FSLR to the top. Therefore, I will not invest in FSLR.
After reaching the financials of the 2012 FSLR annual report, it became very clear to me that FSLR is not a company I would want to invest in. Early in the AR the company touts its advancements in R&D, efficiency, and other technological innovations. Despite this, and a very long list of risk factors, I was alarmed.
First and foremost, FSLR's customers rely on bank loans to find financing for solar panels. As rates continue to rise, this will impact the sales of FSLR. But, this may not hurt FSLR as much as other solar companies as FSLR primarily sells to project developers which resell to end users. More alarming than a decline in sales is the unique risk to all solar companies: competitors, according to the AR, may be able to obtain sovereign capital, enabling competitors to operate at minimal or negative margins for an extended period of time. This debacle is a huge problem for investors in the solar industry, and underscores just how integrated politics and finance truly are.
Just to touch on an accounting issue of FSLR, long-term asset impairment, in my opinion should be listed as a risk factor. According to FSLR, "For long-lived assets, when impairment indicators are present, we compare undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to, determine if the asset group is recoverable." Putting the accounting jargon aside, essentially what will happen is that the market value of the panels will drop when technology advances. The panels will no longer have as much value, and the company will have to take a hit on its income statement. Solar technology will advance and will have an impact on its market value of installed panels compared to expected cash flow.
In the company's defense, it has been able to produce improving results in 2013. Although the results are promising, you have to question their validity and transparency. The CEO of First Solar is none other than James Hughes, the former COO of Enron. There is no doubt in my mind that Mr. Hughes has a complete understanding of First Solar and the industry experience to make First Solar a leader in the industry. But, personally, I don't believe FSLR is the strongest company in the industry. I don't have enough faith in Mr. Hughes to bring FSLR to the top. Therefore, I will not invest in FSLR.
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