First Solar Q4 Earnings Rise On Solar Gen 2 Sale; Yieldco Prospects Encouraging

-3.21%
Downside
167
Market
162
Trefis
FSLR: First Solar logo
FSLR
First Solar

First Solar (NASDAQ:FSLR) published a relatively strong set of Q4 2014 results on February 24, beating market expectations on earnings, although revenues came in below consensus. The results were largely driven by the sale of the Solar Gen 2 project, which helped to mitigate the effect of lower revenues from the company’s legacy projects. While the quarterly net sales grew by around 31% year-over-year to about $1 billion, gross margins rose to 30.6% from about 24.6% a year ago. [1] Financial results aside, there were some other positive developments such as better panel efficiencies and strong bookings. Earlier this week, the company said that it was in advanced stages of negotiations with SunPower (NASDAQ:SPWR) to form a joint yieldco vehicle, which the two companies intend to take public. Here’s a brief overview of the company’s results and our thoughts on the yieldco with SunPower.

Trefis has a $64 price estimate for First Solar, which is about 15% ahead of the current market price.

See Our Complete Analysis For Solar Stocks First Solar|Trina SolarYingli Green EnergySunPower

Relevant Articles
  1. Down 6% This Year, What’s Happening With First Solar Stock?
  2. Down 17% In The Last Six Months, Will First Solar Stock Recover Post Q4 Results?
  3. Up A Mere 15% In 2023, Is First Solar Stock Poised To Do Better In 2024?
  4. Down 30% From Highs Seen In May 2023, Where Is First Solar Stock Headed?
  5. Why Is The Hydrogen Theme Underperforming This Year?
  6. Why This Renewables Theme Is Underperforming In A Strong Market

Solar Gen 2 Project Sale Drives Earnings

During Q4, the company sold its self-developed 150 MW Solar Gen 2 power plant to the Southern Company, which helped to more than offset the decline in revenues from the two legacy projects – the Desert Sunlight and Topaz – which have both achieved substantial completion. The company has been self-developing projects, meaning that it holds the projects on its balance sheet through substantial completion (or commercial operations) rather than selling them while they are under development, allowing it capture greater value. The market and pricing environment for self developed projects has been improving of late, and the company noted that it had realized higher-than-expected gross profits for the Solar Gen 2. First Solar also made reasonably good progress on the business development front, indicating that it had added a total of 2.5 GW in new contracts through 2014 with its current expected module shipments (for both projects and third-party module supply) standing at 4 GW. This translates to a book to bill ratio of about 1.7 for 2014, which means that the company has been adding projects quicker than it is executing them. [2]  However, bookings in terms of expected revenues have remained flat at around $7.5 billion, reflecting the lower prices for projects.

Manufacturing And Technology Updates

The company also continued to make progress on the technology and manufacturing front, with its fleet-wide panel efficiency averaging 14.4% this quarter, representing a 0.2% sequential improvement and a 1% year-over-year improvement.  The Cd-Te thin film technology that the company deploys has a higher theoretical upper limit for efficiency compared to silicon-based panels, and we see this as providing a competitive advantage over the long term. Per the company’s efficiency roadmap, its Cd-Te panel efficiency is expected to equal that of polycrystalline modules by the end of this year, with efficiencies touted to improve to above 19% by 2017. The company also noted that it had commenced production of its silicon-based TetraSun modules in its manufacturing facility in Malaysia. The company has been able to achieve initial cell efficiencies of 20.5% for TetraSun and said that it expects production capacity for these modules to stand at about 50 MW this year (related: First Solar’s Acquisition Of TetraSun Highlights A More Diversified Strategy).

Yieldco With SunPower Is Encouraging

First Solar announced that it intends to jointly form a yieldco with long-time rival SunPower, with the negotiations being in the advanced stages. Although the company didn’t provide specific details, we believe that the move should create value for shareholders. A Yieldco is a separate corporate subsidiary set up by energy companies to transfer a portfolio of energy projects. Yieldcos are usually listed through an IPO after they are spun off from their parent companies. Yieldcos generate stable and predictable cash flows by selling electricity under power purchase agreements and distribute most of their cash through quarterly dividends. The model allows investors to single out the cash flows generated by the power generation assets without giving investors exposure to other aspects of the parent company’s business. Yieldco investments are also liquid, since they trade in the open markets. The Yieldco structure could prove helpful for both companies, since it would allow them to move power plants into the yieldco and potentially use the capital raised to fund new projects, potentially helping to lower the cost of capital. Additionally, since the parent company typically retains a significant stake in the yieldco, it should help to bring in some recurring cash flows in the form of dividends.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap U.S. Mid & Small Cap European Large & Mid Cap

More Trefis Research

Notes:
  1. First Solar Key Financial Data []
  2. First Solar (FSLR) James Alton Hughes on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 2015 []