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Investment Overview for First Solar (NASDAQ:FSLR)
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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.
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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.
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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.
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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 First Solar's R&D as % of Gross Profit
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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
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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.
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.
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Trefis considered the following factors for its forecast:
- 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.
Back to Company OverviewHow 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.
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