First Solar: Stock Of The Day

Competition - as I used to say to my sales force - has a way of keeping competitors honest. The real beneficiary of a healthy business duel, however, is the customer. Particularly when the competition gets down to price.

Nowhere is that more apparent right now than in the solar energy industry. Over the past few weeks, solar panel and module prices have been dropping through the floor. The reason can be summed up in just one word: China.

Executing a strategy not unlike the Japanese car companies did back in the 1970’s and 1980’s, Chinese solar panel manufacturers are selling solar panels for less than it costs to make them.

Suntech Power Holdings (STP) and Yingli Green Energy Holding Company, Ltd. (YGE) are doing it for two reasons: to gain market share and - more importantly - drive demand.

And in another page taken from the Japanese, Suntech is planning to build a module manufacturing plant here, primarily to avoid growing anti-China solar protectionism.

You see, the Obama administration wants to help American solar companies like First Solar, Inc. (FSLR), but it doesn’t necessarily want to help the Chinese makers at the same time.

So the Chinese are quietly fighting back, offering inexpensive government-backed loans in support of their own solar module manufacturers.

The module makers themselves are weaving their way into solar industry trade groups to soften any would-be support for future protectionist legislation. This was done by the Japanese car companies, too.

In the end, it will be good news for homeowners and industrial customers of solar modules, as prices will continue to drop, both here and abroad. Low prices will continue to be the catalyst that drives solar installations, and should actually eliminate any subsidies faster than originally anticipated.

While solar is currently more expensive to generate electricity from than other conventional fossil fuel sources, in the next several years it will be the lowest-cost power available.

What about the huge drop in solar shares? Analysts seem to be divided, but my opinion is the sell-off is a little overdone, particularly when it comes to First Solar.

The reason is that First Solar’s panels are a different breed. It uses thin-film semiconductor technology that has a much lower cost than polysilicon-based panels - which is what most of the Chinese competitors are using.

As a result, First Solar’s cost structure continues to drop as fast as the prices of the modules themselves. The stock is off nearly $64 a share in the last two months, and seems to be firming.

Investors with an eye towards the long term - and who want to be in the solar sector - might want to consider this level as a place to pick up a few shares of First Solar as a buy-and-hold strategy.

I would avoid the Chinese panel makers for the present, until a clearer picture emerges regarding government-pricing policies towards the Chinese panel makers.

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