Did First Solar Just Get A Second Chance?

| About: First Solar, (FSLR)

The fate of companies in the solar industry have always been closely tied to government stimulus. Since solar power is more expensive than energy generated by conventional sources like coal and natural gas, solar providers rely on government subsidies and tax breaks to remain competitive. Even with the widespread effects that socio-economic conditions can have on the industry, I don't think there is any question that there is a part for solar in the world's future energy grid. Furthermore, I believe that no other solar company stands to capitalize more in this market over the next several years than First Solar (NASDAQ:FSLR).

The Obama effect

The political conditions resulting from President Obama's reelection should create a foundational market climate conducive to First Solar's success. The President has long championed renewable energy and instituted policies and programs designed to bolster its value. Consider that during his first term in office, the Obama administration spent over $90 billion on the renewable energy sector through the 2009 economic stimulus plan. Consequently, solar installations in the United States rose from 1.6 GW to 4.4 GW by the end of 2011. During that same time frame, employment in the solar industry tripled, sparked in part by the government's investment tax credit which allows for a 30% tax rebate on the installation of solar equipment -- a credit that has also since been renewed through 2016.

While I'm sure prospective investors are probably happy to hear that the Obama administration is maintaining status quo, I'm also willing to bet that readers are well aware that these benefits did little to alleviate First Solar's widely publicized struggles. But here's the catch. This time around, the government has taken a strict stance against Chinese solar imports.

On November 8th, the U.S. International Trade Commission voted in favor of doubling and tripling duties on imported solar panels from China. Worth billions in penalties, I believe this policy will significantly impair some of First Solar's toughest Chinese rivals including Yingli Energy (NYSE:YGE), Canadian Solar (NASDAQ:CSIQ), Trina Solar (NYSE:TSL), LDK Solar (NYSE:LDK) and Suntech Power Holdings (NYSE:STP), from being able to compete on a level playing field with First Solar in the United States. Indeed, one of the most important barometers for measuring a solar provider's prospects for success, relates simply to its ability to sell solar panels above cost. With duties placed on imported panels, I think it will be impossible for struggling competitors like Suntech Power Holdings -- gross profit margin at 0.59% and LDK, with its margin of negative 65.1% , to vie domestically with First Solar at all.

At the same time, I think that Chinese companies with slightly stronger margins like Trina Solar will still find these tariffs a very tall order to contend with. Many of these firms aren't even on solid footing at home. For example, it has been widely speculated that Suntech might become nationalized while firms like Yingli Energy are seeing margins turn negative by 22-24%, due to shipment decreases. On top of that, these tariffs will be detrimental to firms like Canadian Solar, which rely on solar cell supply partners located in China to for large portions of their manufacturing materials.

An intelligently growing business

In addition to these important positive externalities, I think there is a lot to like about the wider direction First Solar is heading. From a performance standpoint, the company is excelling. In Q2 2012, the solar provider posted revenue of $937 million, beating estimates by $137 million. It also raised its 2012 sales and EPS guidance ahead of analyst estimates calling for sales of $3.6-$3.9 billion and EPS of $4.20-$4.70, compared to consensus estimates of $3.5 billion in revenue and $3.95 in EPS. And don't forget the all important profit margin. In Q2, First Solar reported a healthy gross margin of 25.5% a jump of 10% over Q1.

There have been a couple of major factors that have contributed to these earnings that I believe will continue to positively improve First Solar's performance down the road. One such cause has been the company's commitment to advancing its technologies. For example, First Solar's proprietary and robust grid integration system enables customers to produce the maximum amount of energy and revenue from sites, all while minimizing cost and risk. Similarly, First Solar's leading expertise in module efficiency has allowed the company to improve capacity utilization from 63% to 83% and has decreased its cost per watt by $0.05.

First Solar has leveraged these technical advancements to intelligently create a second business strength. Rather than only competing at razor-thin margins against the aforementioned plethora of heavily subsidized Chinese panel manufacturers, the company has smartly pivoted part of its business to target utility scale solar. By selling solar farms, I think the firm gains a few key competitive advantages. First, it can create efficiencies and limit overhead by cutting costly solar panel production. Second, the sale of solar farms mitigates risk by nature of the process itself: To begin, First Solar obtains all the necessary permits and financing for a project, then arranges for a utility to buy the power it produces, and finally sells the plant to an energy company whom pays First Solar up front as well as additional revenue during construction to cover labor and panel costs.

Given its focus on utility scale solar, both from a technical and business perspective, First Solar has positioned itself as the leader in the space. Some of its more notable utility buyers include Exelon (NYSE:EXC), Enbridge (NYSE:ENB) and Berkshire Hathaway's (NYSE:BRK.A) Mid-American Energy Division. Moreover, with new projects on the way in the United States, Australia, India and Dubai, First Solar has effectively diversified its risk. Currently, a little more than half of First Solar's revenues come from these utility scale projects, whereas its competitors obtain 90% of their revenue strictly from solar panel sales. Solar farm production thus provides the added benefit of insulating First Solar's performance from industry effects that lie outside the firm's control such as government policies.


I don't think there is any doubt that solar energy will be part of the world's future. As one of the current leaders in the space, I believe that First Solar enjoys a superior position on which it can capitalize. The company has recently shown strong performance, continues to develop unique technology, is executing a diverse business model and has the decisive benefit of government protection at home in the United States. The same cannot be said for many of its competitors. It's for these reasons that I am bullish on First Solar's long-term growth potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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