First Solar Faces Challenging Times, but the Stock Still Has Long-Term Potential

In the last few months, solar stocks have taken a beating.

An economic slowdown in China, as well as the election of Donald Trump as U.S. president, is putting pressure on companies that manufacture and market solar panels. Trump will continue to have a negative effect on this industry, as well as alternative energy, as he holds controversial views on climate change.

Among solar stocks, First Solar (FSLR) is facing a particularly rocky patch and has just announced a massive downsizing. The company plans to fire one out of every four employees -- about 6,000 jobs, in all -- in a desperate bid to overhaul its operations. That has sent its stock plummeting. First Solar shares fell more than 6% in Friday trading.

Still, the company could present an opportunity for investors with a long-term perspective.

First Solar has already lost more than half its value in 2016. Required rates of return for its projects have shot up recently, hurting First Solar's bottom line.

First Solar is bleeding profusely from the knockout beating that the solar industry has recently received. To return to shape, the company has suggested a phase-out of its current production of the Series 4 module and the abandonment of its Series 5 line. It also hopes to accelerate production of Series 6.

Experts see the job cuts, along with the realigning of strategy and operations, as necessary short-term adjustments.

The improved costs and efficiency of Series 6 modules supports First Solar's decision, but the transition will be protracted -- expected to last until the second half of 2018. Benefits are not expected before 2019.

Meanwhile, shareholders will also have to bear the effects of the restructuring.

First Solar's job cuts could result in pretax charges of $500 million to $700 million. Most of this will be charged to First Solar's books in 2016 itself.

First Solar warned earlier this month of significant challenges next year due to a 30% slip in prices. Slowing demand in China and the resulting oversupply of panels globally are other concerns for the company.

With bigger customers delaying signing contracts in the quest for bargain prices, sales are off.

However, it's not all bleak for First Solar. The company continues to carry a healthy balance sheet.

First Solar's net cash balance will be around $1.4 to $1.6 billion at the end of fiscal year 2017, once the initial restructuring challenges have been completed.

At this moment, First Solar is at a lower valuation given that the stock is on a 50% discount compared to last year. Its strategic moves such as accelerating the Series 6 solar product should come to fruition in two to three years. The solar industry -- with or without the support of President-elect Trump -- will remain the energy industry of the future.

Short-term fears might worry investors looking for easy gains. However, if you can stomach the current ups and downs, you could harvest some spectacular gains in the long term.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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