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Investment Overview for First Solar (NASDAQ:FSLR)
Below are key drivers of First Solar's value that present opportunities for upside or downside to the current Trefis price estimate for First Solar:
International Photovoltaic modules
- Gross Margins: The manufacturing cost of solar cells for First Solar declined from $1.47 per watt in 2005 to $0.75 per watt in 2010 due to significant improvements in technology. These figures are the lowest in the solar industry. As a percentage of the sales price, the company's manufacturing costs (adjusted for depreciation) fell from 59.2% in 2009 to 47% in 2011. We expect margins to decline to 20% by the end of the Trefis forecast period. If margins stabilize at around 30%, there is a 20% upside to our price estimate. If margins fall to 10% however, there could be a 20% downside.
- Price per Watt of PV Modules Sold: The average price per watt decreased from $2.25 in 2007 to $1.55 in 2010. Prices fell sharply to $1.04 in 2011 because of the shake up in the solar market. We expect that prices will continue to fall to around $0.60/watt by the end of the Trefis forecast period. However, if prices fall at a slower rate than estimated and reach $0.70 per watt by the end of the period, the Trefis price estimate could see a 10% upside.
First Solar is engaged in the manufacture and sale of solar modules with an advanced thin film semiconductor technology. In addition the firm also designs, constructs and sells photovoltaic (PV) solar power systems. The company operates in two main business segments: the components segment and the systems segment. The components segment is responsible for the design, manufacture and sale of solar modules to solar project developers and system integrators. The systems segment provides PV solar power system for commercial systems, which includes project development, engineering, procurement and construction (EPC), operating and maintenance (O&M) services.
The International PV Modules division is the primary source of value for the following reasons
Growth in markets outside Germany
In 2009, 2010 and 2011 Germany contributed around 712 MW, 593 and 457 MW worth of PV module sales compared to 317 MW. 480 and 636 MW by the Rest of The World. As countries globally adopt solar energy as an alternative means of generating electricity and First Solar diversifies away from the German market, PV module sales in other countries are expected to rise.
Legislature to aid renewable energy projects
Governments all across the world have taken measures to encourage the use of solar technology as a way to help them remove their dependence on fossil fuels. The U.S. government's Emergency Economic Stabilization Act of 2008 provided tax credits to investments made in alternative energy projects. Similarly the American Recovery and Reinvestment Act of 2009 provides tax incentives worth 30% of the total cost of installation, but the tax incentives in the U.S. expired at the end of 2011. However since 2012, most solar incentive programs announced were from emerging markets such as China and other places like Japan. Government subsidies and tax credits have enabled renewable energy companies like First Solar to thrive.
Australia’s PV market has been largely driven by demand in the residential sector with approximately 80% of the installed capacity being used for residential use. As a significant portion of the country’s electricity is generated through cheap coal, the solar market growth has been quite steady in the past. The government has revised its Solar Flagship program aiming to generate 20% of the nation's power supply from renewable sources. Australia had an installed capacity of around 1.03 GW in August 2011.
While governments have been cutting back subsidies of late, we expect subsidies in many countries to remain in place in order to encourage further growth in the industry.
Impact of the economic crisis
The global economic crisis had a profound impact on the solar industry. The rise in energy prices prior to the economic downturn led many solar manufacturers to increase capacity. This helped certain manufacturers as they benefited from economies of scale which in turn helped reduce prices. However, due to the credit contraction that occurred during the financial crisis, the installation of solar power systems declined significantly. The economic crisis impacted demand for everything ranging from polysilicon to rooftop panels. As a result many smaller players with weak balance sheets have been struggling which has led to consolidation in the industry.
Innovation in solar technology
The PV industry has seen strong growth in the past few years and the total number of solar cells produced globally has increased over seven times in the past five years. Installation of these solar technologies has also increased sharply during this period. Solar companies are continuously working to improve current technology, reduce costs and make systems more efficient. PV module efficiency and costs are drivers for most of the PV power plants; therefore maintaining and improving these aspects of the company are important.
Growth in Emerging Markets
Europe and developed nations are not the only ones taking the lead in the solar industry. According to EPIA, solar installations in emerging markets will become a major source of sales by 2016 as solar power becomes competitive with diesel power generation.
In China, with the help of Solar Rooftops and the Golden Sun programs in 2009, the PV market in China experienced strong growth achieving 228 MW in 2009 and then installed around 3 GW of panels in 2011. China is expected to become the largest market for solar installations by 2014 and install between 3-5 GW.
Trefis Forecast Rationale for Price per Watt of PV Modules Sold
This refers to the average sales price per watt of energy that First Solar realizes on the sale of solar modules.
The average price per watt increased from $2.25 in 2006 to $2.43 in 2007 due to a favorable exchange rate between the U.S. Dollar and the Euro, which was partially offset by a price decline in that in module prices that year. Average prices fell in 2008 to $2.37 mainly due to the 6.5% contractual price decline that the firm’s long term supply contracts are engaged in at the beginning of each year. This was offset by a 6% increase related to favorable exchange rates between the U.S. Dollar and the Euro as approximately 74% of the firm’s net sales in 2008 resulted from sales of solar modules to customers in Germany. Prices declined sharply in 2009 to $1.77 due to competitive pressure and the commencement of the customer rebate program during the third quarter of 2009. The average selling price was adversely impacted by 4% due to a decrease in the foreign exchange rate between the U.S. Dollar and the Euro as well as a 1% change in the customer mix. Approximately 65% of net sales during 2009 were in Germany compared to 74% in 2008. The substantially increased competition drove prices further down to $1.55 per watt in 2010, while subsidy cuts and overcapacity led prices to decline to $1.04 in 2011 and $0.63 in 2012.
As production costs decrease, the average selling price will continue to decline making solar a more attractive alternative energy solution. We expect prices to decline steadily, although at a slower rate, through the Trefis forecast period.
Trefis considered the following factors for its forecast:
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- Oversupply to lead to price declines
- PV module prices dropped significantly in 2009-2011 due to an increase in inventory of finished goods amongst major solar players in addition to stagnant demand. In an attempt to increase sales and pay off debt, many PV module manufacturers had to cut prices. According to GreenTech Media research (GTM) module supply will outpace demand by more than 20% over the next few years. This will keep prices declining steadily.
- Subsidy cuts to keep prices depressed
- The solar industry is largely incentive driven and dependent on subsidies and tax credits provided by governments. Because of economic conditions and budget deficits, many governments have had to cut subsidies such as those for solar power. The reduced incentives have led to lower demand and therefore lower prices.
- Some governments have even retroactively cut subsidies, which has had an even more drastic impact on demand and prices. This declining demand from major markets has kept prices low and will likely lead to further price decreases in the next few years.
- Drop in polysilicon prices
- As polysilicon prices have dropped substantially, solar players have been able to offer modules at lower prices. While First Solar doesn't use polysilicon in its thin films, it will likely have to lower its prices in order to remain competitive.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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