First Solar Updates And What’s Driving Our $65 Price Estimate

First Solar (NASDAQ:FSLR), the largest U.S. solar company, swung to a loss for Q1 2015 as revenues plummeted owing to project delays, the company’s decision to kept completed projects on its books ahead of its proposed joint YieldCo with SunPower (NASDAQ:SPWR) and a higher mix of module only sales. While quarterly revenues fell by 51% year-over-year to about $469 million, net losses stood at $62 million, compared to a profit of about $112 million a year ago. ^[1] Financials aside, the company had a respectable quarter, making good progress on the technology and business development front.  In this note, we take a look at some of the recent developments for First Solar and factors driving our $65 price estimate for the company.

Our $65 price estimate for First Solar represents a 15% premium over the current market price.

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Solar Project Revenues Declined, YieldCo Will Add Value

First Solar’s solar projects business saw revenues decline to about to $368 million from about $909 million a year ago, as the company faced some project delays and also elected to hold on to projects on its balance sheet ahead of the creation of its joint-venture YieldCo with rival SunPower. The two companies intend to take the YieldCo – called 8point3 Energy Partners –public by the end of this year, with plans to raise as much as $50 million. 8point3 Energy Partners will have an initial portfolio of projects totaling 432 MW (262 MW of utility-scale projects from First Solar and 170 MW of utility and distributed projects from SunPower), all located in the United States. ^[2] The YieldCo also has a Right of First Offer (ROFO) for 1,131 MW of projects. The YieldCo structure could prove helpful for both companies, since it would allow them to move power plants into the YieldCo and use the capital raised to fund new projects, potentially helping to lower the cost of capital. Additionally, since the two companies will hold a significant stake in the YieldCo, it should bring in recurring cash flows in the form of dividends.

Bookings, Deal With Caterpillar

First Solar’s total bookings for Q1 stood at 422 MW against shipments of 690 MW. The company also booked an additional 483 MW in April, taking its total bookings to 3.9 GW, an increase of 200 MW from the end of 2014.  Bookings in terms of expected revenue stood at $7.6 billion at the end of April, up from about $7.3 billion at the end of 2014. The company’s potential booking opportunities grew to about 14 GW, with close to 60% of the opportunities coming from overseas. Separately, First Solar entered into a strategic alliance with industrial behemoth Caterpillar to provide integrated turnkey photovoltaic solutions for microgrid applications. The solution will integrate First Solar panels (to be sold under the Cat brand) and related balance of systems equipment with Caterpillar’s generator sets and energy storage offerings. The solution will be targeted at locations such as mines in remote areas that are off the grid or have unreliable power supply. The deal should give First Solar access to Caterpillar’s vast global sales and distribution network and its large base of genset customers.

Efficiency Gains Open New Opportunities, Help Expand Capacity

First Solar’s Cadmium Telluride (Cd-Te) panels have been seeing solid efficiency gains over the past few years, outpacing efficiency improvements in the broader solar industry. Average conversion efficiency stood at 14.7% for Q1, representing a 1.2% year-over-year improvement and a 0.3% sequential improvement. Additionally, the conversion efficiency of the company’s best production line grew to 16.3%, which puts it ahead of many polycrystalline panels. For example, Trina Solar’s popular PC05 multi-crystalline module offers efficiencies of about 15%. Per the company’s roadmap, Cd-Te panel efficiency set to improve to about 19.5% by 2017. The higher efficiencies have multiple benefits for First Solar. Firstly, it should open the doors for the company into the rapidly growing rooftop solar market, which it has long neglected owing to its historical efficiency handicap. Secondly, the higher efficiencies should help to reduce per-watt manufacturing costs. For example, the company noted that the 16.3% efficiency modules have a cost-per-watt of about $0.40, excluding selling costs. ^[3] Thirdly, the improvements will also result in significant incremental manufacturing capacity for the company, without having to build new factories, since each module will deliver a higher rated capacity as efficiency improves.

Manufacturing Capacity To Meet Demand Ahead of ITC Decline

Global solar installations are expected to grow by about 20% to around 58 GW in 2015, according to Bloomberg New Energy Finance. Additionally, demand for solar panels in the United States could be strong over the next two years, as installers take advantage of the U.S. Solar Investment Tax Credit (ITC) which is expected to be reduced by the end of 2016. The ITC is expected to drop from 30% to 10% for commercial projects and to zero for directly owned residential projects. First Solar seems well placed to deal with the spurt in demand, owing to its adequate manufacturing capacity and its continuous panel efficiency improvements, unlike rivals such as SunPower who have been facing some capacity constraints. As of December 31, 2014, the company had 30 installed production lines with an annual global manufacturing capacity of approximately 2.7 GW at its manufacturing facilities in Ohio and Malaysia. In addition to this, the company also has about 1.3 GW of capacity through stored manufacturing equipment from its former German factories and from other manufacturing facilities that were put on hold. ((First Solar 2014 Form 10-K))

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1. First Solar Form 10-Q [↩]
2. Form S-1 [↩]
3. First Solar’s (FSLR) CEO Jim Hughes on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 2015 [↩]