BOSTON (TheStreet) -- First Solar (FSLR - Get Report) has wonMorningstar's coveted five-star stock rating. Morningstar bestows the score on 30 of the 1,700 stocks in its coverage universe. Growth, competitive pricing and wider market share will support First Solar's stock in 2011.
Subsidy risks are worth noting. Solar remains expensive relative to other power sources and it is less reliable, given the variability of weather and sunlight hours. Policy changes can gravely affect demand. Spain's 2008 cap catalyzed a 90% drop in 2009 installations. Yet, China and the U.S. remain positive on the industry and it is a politically popular alternative energy, so the subsidy environment is likely to remain favorable in the coming years. Morningstar forecasts 37% annual growth over the next five years as the operating margin gradually falls to 26%. As demand is dependent upon a favorable subsidy environment and a lack of cost-effective alternatives, such as wind or geothermal, Morningstar assigns First Solar "medium fair-value uncertainty." Bulls stress that a demand shift from high-subsidy European markets to lower-subsidy markets such as the U.S. will enforce the relevance of cost advantage and strengthen First Solar's competitive position. Furthermore, its custom-built and tightly guarded production lines provide another advantage. A record of cost per watt cuts abets the investment thesis for First Solar. And $583 million of net liquidity (cash minus debt) represents fodder for growth. In the past few years, marked by the worst economic contraction since the Great Depression, solar has demonstrated staying power. Interestingly, many of the once-favored equities, including First Solar, experienced multiple contraction over that span. Currently, the stock trades at a forward earnings multiple of 15 and a cash flow multiple of 15, at parity with industry averages. A trailing earnings multiple of 18 represents a 14% peer discount and an absurd 81% discount to the stock's five-year average. Is the stock market now condemning First Solar or mispricing its growth prospects? Morningstar suggests the latter. But it's clear that investors are no longer willing to pay a significant premium for U.S. solar stocks. Like First Solar, SunPower ( SPWRA) trades at an 85% discount to its five-year average P/E. Still, sell-side analysts echo Morningstar's optimism. Of those covering First Solar, 26, or 52%, rate its stock "buy," 18 rate it "hold" and six rate it "sell." Piper Jaffray offers the highest price target, at $200, suggesting the stock could rise 55% in the next 12 months. Lazard Capital Markets predicts an advance of 47% to $190.
-- Written by Jake Lynch in Boston.
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