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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:
PV Solar Systems
- Systems Revenues: First Solar's PV systems revenues have expanded from around $100 million in 2009 to over $2 billion in 2013. The growth in this business has been aided by government incentives as well as the increasing economic viability of solar power systems. We estimate that revenues from this business will grow to around $3.3 billion by the end of the Trefis forecast period on the back of increasing project activity overseas. If revenues from this business exceed our expectations and actually grow to around $4.5 billion by the end of the Trefis forecast period, it could result in a 15% increase to the Trefis price estimate. On the contrary, if revenues from the systems business only rise to around $2.5 billion, it could result in a 10% downside to the Trefis price estimate.
United States PV Modules
- Gross Margins: The manufacturing cost of solar cells for First Solar declined from $1.47 per watt in 2005 to under $0.60 per watt in 2013 due to significant improvements in technology. These figures are currently the lowest in the solar industry. We expect the company's manufacturing costs to trend lower while average selling prices could remain stable, translating to better gross margins. We forecast that the company's gross margins will stabilize at around 18% at the end of the Trefis forecast period. If margins stabilize actually rise to around 25%, there could be an upside of around 5% to our price estimate. On the other hand, if fall to 10% however, there could be a 7% downside to our price estimate.
- 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 per watt in 2011 because of the shake up in the solar market and continued to fall to around $0.73 per watt in 2013. We expect prices to stabilize at current levels going forward, given the increasing global demand for solar panels and the slowdown in expansion capital expenditures in the solar industry.
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 PV Solar Systems division is the primary source of value for the company for the following reasons:
Higher Gross Margins
First Solar's systems business has higher gross margins (over 40%) when compared to its solar panels business (about 15%) since the systems business involves supplying solar panels as well as related engineering, procurement and construction services. The business is relatively less commoditized, and faces less competition from Chinese solar companies.
Growth in Markets Outside North America
First Solar's systems business is presently largely centred around the U.S. market. However, the company has a lot of opportunity overseas, particularly in markets like Latin America where electricity rates are high and consumption growth is much stronger than in the United States. Other growth markets include the Middle East, Asia Pacific and China. The company has indicated that around 56% of its new systems booking opportunities (in terms of system capacity) come from overseas.
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. For instance, in the United States, at the Federal level, the government offers incentives including an investment tax credit (ITC) of around 30% on the initial cost of a solar system. Besides this, there is also legislation at the state level, such as the renewable portfolio standards, that require utility companies to generate a certain portion of their electricity from renewable sources.
However of late, most of the new solar incentive programs announced have been 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. 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.
Supply Demand Rationalization
Solar panel prices have seen a continual decline over the last several years, as new capacity expansions led to a glut in the global markets. For instance, in 2013, while global solar capacity was estimated at about 45 GW, demand was well below 40 GW. However, things could change going forward as effective manufacturing capacity is expected to remain stagnant in the near term, as companies have been curtailing expansion projects. During 2013, spending on photovoltaic manufacturing equipment fell to an 8-year low of around $1.73 billion down from a peak of about $13 billion in 2011. However, demand is expected to grow at a healthy rate rising to as much as 49 GW in 2014. This could bring bring about better pricing in the markets.
Emerging Solar Markets Will Account For Bulk Of Future Demand
China became the worlds largest solar market in 2013, overtaking Germany as the worlds largest solar market. Other emerging markets such as Latin America and the Middle East are also becoming important markets for solar power, given a combination of high electricity prices and strong consumption growth.
Trefis Forecast Rationale for First Solar's R&D as % of Gross Profit
Research and development expenses consists primarily of salaries and personnel related costs and the cost of products, materials and outside services used in product research and development activities. Any depreciation associated with the equipment acquired for general use during the research process is also include in these expenses.
Research and development expenses increased from $6.4 million in 2006 to $78.2 million in 2009 as the firm invested heavily in research to improve the conversion efficiency of solar modules as well as improving manufacturing efficiency. R&D expenses for 2010 were $94.8 million. In 2011 and 2012, expenses were $140 and $132 million respectively. In 2013, the number increased modestly to around $134 million or 12.2% of gross profits.
We believe R&D expenses will continue to grow as the firm continues to focus on efficiency and improving the current product lines to ensure in remains competitive in the solar market.
Trefis considered the following factors for its forecast:
Back to Company Overview
- Research grants and collaborations to help reduce expenses
- First Solar has received research grants in the past from the U.S. government under which the company has been reimbursed for specific costs incurred from certain research projects. During 2007 and 2008 $1.8 million and $0.9 million worth of grants were awarded with none being given during 2009.
- The firm also maintains active collaborations with the National Renewable Energy Laboratory (division of the U.S. department of energy), Brookhaven National Laboratory and several universities to continue focus on improving solar efficiency.
- Quality improvements conducted at the Ohio facility
- Process and product improvements for full production are generally conducted at First Solar's Ohio plant and then propagated to other production lines. The firm typically implements, validates and qualifies improvements at the Ohio facility before deploying it to all the other production lines. This approach has help provide continuous improvements and ensure adoption across all the firms production lines at the same time has helped reduce costs
- Competition from other players
- While First Solar's cost advantage has placed them as one of the world's largest solar PV module manufacturers, other players in the industry are developing a variety of competing photovoltaic technologies which include copper indium gallium diselenide and amorphous silicon which could produce solar modules at a cheaper price or prove to be better in terms of conversion efficiency.
- Other companies could potentially develop more highly reliable renewable energy systems that mitigates the intermittent power production drawbacks of many renewable energy systems or offers more value added services. Such things will likely require that the company increases its R&D budget 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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