Did The Market Overreact To First Solar’s Guidance Cut?

First Solar (NASDAQ:FSLR), the largest U.S. solar equipment manufacturer, published a mixed set of Q3 2018 results on Thursday. While earnings came in ahead of market expectations, the company reduced its outlook for the full year, citing higher costs associated with the ramp-up of its new Series 6 manufacturing and a shift of a project sale in Japan into next year. While the stock declined by about 9% in after-hours trading, we believe that the company’s fundamentals remain strong in a difficult market, on account of its robust new bookings performance and continued progress in its technology transition to the Series 6 product.

We have created an interactive dashboard analysis on what to expect from First Solar for 2018. You can modify the key drivers to arrive at your own forecasts and valuation for the company.

 Demand From U.S. Utilities and Corporates Drives Bookings

First Solar made good progress on the business development front, adding 1.1 gigawatts (GW) of new bookings since its last conference call, taking its total future contracts for shipments to 11.3 GW. Procurement from utilities and corporate customers in the United States was the biggest driver of bookings, and the company indicated that it expects the trend to remain strong. For instance, First Solar says that it expects utilities outside of California to procure more than 15 GW of solar capacity over the next three years. While the broader market for solar products is slowing, due to a solar policy change in China, which is expected to slash installations in the country by almost 40%, First Solar indicated that it actually booked over 1.6 GW since May 31, when the Chinese policy revision was announced. It’s likely that the company’s outperformance is being driven by demand for its new Series 6 modules (see below) and also due to regulatory tailwinds in the U.S., where the company’s rivals’ panels have been subject to tariffs.

Series 6 Transition Progress

First Solar has been ramping up the capacity of its next-generation Series 6 panels, with production underway in factories in Ohio, Malaysia and most recently, Vietnam. The new panels are important for the company, as they have a significantly higher rated power capacity compared to its legacy Series 4 panels, with manufacturing costs also estimated to be as much as 40% lower. First Solar noted that its Ohio factory now has throughput levels of about  90% of its total capacity, while the Malaysian unit is at levels of about 75%. The company’s ramp of Series 6 production will be crucial, as it has indicated that its capacity was sold out for the product through the year 2020.  The company has planned a total of 6.6 GW of Series 6 production capacity.

Utility Scale Project Delay Hurts Full Year Outlook

First Solar’s earnings are typically lumpy on account of its focus on utility-scale projects and large orders, and the company had to cut its guidance for the full year, largely due to the delayed sale of its Ishikawa project in Japan. First Solar expects its EPS for the year to come in between $1.40 and $1.60, with revenues projected to be between $2.3 billion and $2.4 billion. The company also reduced its shipments guidance for the year to 2.6-2.7 GW, compared to its prior outlook of 2.8-2.9 GW, with gross margin forecast at 18.5%to 19.5%, almost 2% below its previous guidance. However, the spillover of the project could bode well for the company’s Q1 2019 results.