First Solar Earnings Driven By Campo Verde Project, Lower Costs; Stock Worth $66

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FSLR: First Solar logo
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First Solar

First Solar (NASDAQ:FSLR) posted a strong set of Q1 2014 results on May 6, beating market expectations on both earnings and revenues. The company’s results were aided by revenue recognition on its large scale solar power plants in North America as well as lower balance of system and panel manufacturing costs. Quarterly revenues rose by around 25% year-over-year to around $950 million, while net income grew to $112 million from about $59 million a year ago. [1] The company also updated its earnings guidance for 2014, projecting an EPS of around $2.40 t0 $2.80, compared to its previous guidance of $2.20 to $2.60. The company also narrowed its gross margins forecast  to between 17% and 18%. We have increased our price estimate for First Solar from $53 to about $66, to account for better margins and improved utility-scale prospects overseas. Below, we discuss a few of the trends that drove the company’s earnings and some key changes to our valuation model for the company.

See our complete analysis of First Solar here


Revenue Recognition On Campo Verde Project Drives Earnings: First Solar derives about two-thirds of its revenues from its systems business, which involves building, operating and maintaining large-scale solar power plants. The company’s results are sometimes volatile, since they are dependent on achieving certain revenue recognition criteria for projects. This quarter’s strong performance was partly attributable to the fact that the company recognized 100% of the project revenue from its 139 megawatt (MW) Campo Verde project in southern California. [2] The project, which began construction in late 2012, was sold to Southern Power and Turner Renewable Energy.

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Expanding Systems Business Overseas: The company added about 404 MW of new bookings in the quarter, while shipments stood at around 312 MW, translating to a solid book-to-bill ratio of over 1. However, in terms of future expected revenues, the dollar value of bookings fell slightly due to lower pricing. The new bookings include a 53 MW project in Jordan as well as some projects in California. First Solar indicated that it has been able to expand its pipeline of potential business opportunities to around 12.2 gigawatts (GW), with around 1.25 GW of the deals in the mid-to-late stages. While close to 57% of the opportunities come from overseas, the company has been seeing a lot of interest in the United States as well. Through the quarter, the company saw its U.S. opportunity set increase by around 600 MW. This is quite encouraging, since the potential bookings come despite the fact that the U.S. utility-scale solar market could be cooling off. (See Also: Why The U.S. Utility Solar Market Is Slowing Down)

Efficiency Improvements Could Help Costs, Competitiveness: First Solar has been making good progress on the efficiency front. Although the company’s Cd-Te panels still trail silicon-based panels in terms of efficiencies, the company’s efficiencies have been rising faster than those of many polycrystalline based manufacturers. For instance, over Q1, First Solar’s average fleet efficiency improved by about 60 basis points year-over-year to around 13.5%, while the best line efficiencies rose to around 14.2%. [3] Higher conversion efficiencies are beneficial for solar companies for multiple reasons. Firstly, they lower the cost of manufacturing a panel, due to the smaller amount of consumables and raw materials required to produce each watt of panels. Higher efficiencies could result in better pricing power and potentially open up new markets, such as rooftops.  This could help the company increase the total addressable market size. The company expects panel efficiencies to improve to 19.5% by 2017, according to information provided during its analyst day conference.

Price Estimate Revised To $66

We have increased our price estimate for First Solar from $53 to about $66, which is slightly below the current market price. Here are some of the key changes to our discounted cash flow model.

1) Increased systems revenues to around $4 billion by the year 2020, to account for better international sales. Our previous estimate for FY 2020 stood at around $3.4 billion (impacted price estimate by roughly +$7.50).

2) Increased the gross margins for the modules business to around 21% by the end of the Trefis forecast period, in order to account for lower per-unit manufacturing costs (+$3.50).

3) Changes to net working capital and other assets (+$3).

4)Reduced cash and cash equivalents; increase in share count (-$1.50).

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Notes:
  1. First Solar Q1 2014 Earnings Press Release []
  2. First Solar Q1 2014 Earnings Conference Call Transcript, Seeking Alpha, May 2014 []
  3. First Solar Q1 2014 Earnings Supplementary Presentation []