First Solar's Ultraviolet Earnings

Solar Energy has been one of the most notable of all the Green/Clean technologies. Solar Energy is not a new phenomenon; it can be traced back before the birth of Jesus, but did not start getting serious notice until the multiple The Energy Crisis of the 1970s crippled America. The oil embargo of 1973 was the first incident, with OPEC’s “October War” when they decided to stop shipping oil to countries that supported Israel. Followed by the “Energy Crisis of 1979”, which saw Iran’s oil infrastructure impeded due to a coup d’état that installed Ayatollah Khomeini as the new ruler.

In response to this massive disruption, the US government began instituting legislative policies to reduce the country’s dependence on foreign energy sources. …reminds me of a T. Boone Pickens commercial. Thus the “Crude Oil Windfall Act of 1980” was enacted, for oil companies that earned extra profit due to the increase in oil prices. The act established an excise tax, which would tax the difference between the current market price and a 1979 base price, as well as energy tax credits. Businesses and homeowners who utilized alternative energy sources, such as solar, wind, and geothermal, received this energy credit. Unfortunately, these tax credits were phased out in 1986, as oil prices subsided.

History Repeats Itself

Fast forward to the new millennium, and you find a repeat of the 70s Energy crisis with $146+ a barrel oil prices in the July of 2008 and most recently $80 a barrel oil, after oil price fell to $46/barrel in Feb 2009. Ironically, congress started to reintroduce energy credits, just a few years prior to this last oil run up. These credits, which did not originally cover alternative energy sources, have been amended to include solar, wind and biofuels.

Making Money with the Sun….

One of the many companies at the forefront of the alternative energy space is First Solar (FSLR). Incorporated in 1999, First Solar is a leading producer of solar panels and at the amazement of alternative investment naysayers, it has been quite profitable. Recently beating the streets earnings estimates of $1.746 (EPS) vs. actual earnings of $1.79 (EPS) for 3Q 2009. Year-to-date FSLR has returned a 9.87% return. Since its IPO, in 2006 this company has produced amazing revenues growth, earning $134,9700,00 in 2006, $503,980,000 in 2007 and $1,246,300,000 in 2008. Earning growth over those three years exceeded 823%. First Solar is also the largest holding in the Claymore/MAC Global Solar Energy ETF (TAN), with a weight of 11.98%, in the fund.

click to enlarge

When you examine this company’s geographical revenue segments, you discover that the 73.77% of it’s revenue is derived from Germany versus 21.17% in the United States. Ironically, the number one geographical segment represented in the Claymore solar ETF (TAN), is Germany as well. Clearly, the Germans favor solar energy more then the American do.

The US Federal Government announced on Wednesday October 26^th that it will allocate $2.2 billion in bonds for renewable energy initiatives. Approximately 800 government agencies and utilities have been earmarked to receive these funds for clean projects. The allocation for solar projects is estimated to about $808.6 million, which is approximately 37% of the overall earmark. This is an about face for the US government, taking such a proactive approach to our energy situation. These allocations will clearly benefit First Solar's top and bottom line over the next 12 to 18 months, by having the potential to increase its US sales figures.

Federal Solar Allocation
State		Allocation
California		$675,618,483
New Jersey		$45,263,475
Florida		$34,000,000
Arizona		$22,890,000
Massachusetts		$14,855,881
Nevada		$10,235,053
Delaware		$2,700,770
Vermont		$1,371,756
Wisconsin		$1,000,000
Oregon		$433,000
Washington		$250,000
data provided by Internal Revenue Service

Comments

[captainccs:]

>>>with OPEC’s “October War” when they decided to stop shipping oil to countries that supported Israel. <<<

Please get your facts straight. It was NOT an OPEC embargo. It was an ARAB embargo. It was the ARAB member states of OPEC that withheld oil. not countries like Venezuela, a founding member of OPEC.

www.state.gov/r/pa/ho/...

Oct 30 09:01 AM

[Inveztor:]

If the author is correct, the current downdraft in FRSL should be an amazing opportunity to buy into this fast growing, leading player in a politically correct theater.

Unfortunately I decided to short the stock in spite of its massive growth. Germany is indeed a big buyer of solar. Whether it will remain so in the future after the Merkel victory remains to be seen. I think that Germany will scale back subsidies.
There is also a massive oversupply of solar panels, especially detrimental to this company for reasons one can explore elsewere.

I would be delighted for the stock to run up today so that I can short some more. Writing puts against these shorts is also a profitable strategy.
What did puzzle me is how the stock acted before the earnings announcement two days ago. It was strong. Yet earnings came out as expected and FRSL tanked from 152 to 128.
Good to point out that there is an ETF. Given the oversupply there is less risk in shorting the whole herd, but in my view FLSR and STP are among the prime candidates for implosion.
Mind you, I have nothing against solar energy, I think it is the way to go, or at least one of the ways. I have nothing against Jesus either and may Allah bless Ayatollah Khomeiny's soul.
But oversupply is oversupply and price pressure is price pressure.
Germany doesn't have that much sun and the lights are turning green there for nuclear, not for solar. That sector has had its day in the sun, if the new government can help it.

Short FLSR, STP

Oct 30 09:57 AM

[Windsun33:]

Germany is a special case. For the past few years they have had extremely high solar subsidies - some would say beyond reason, at one time as much as $10 per watt. About 4-5 years ago they cut back some due to some scandals involving multiple people getting rebates on the same system (some people were renting fake solar panels so you could scam the rebates also).

However, Germany has been scaling back the past year or two, and will probably take a big hit this year. And like Spain's wind fiasco, it appears that the billions put into solar subsidies have done little or nothing to reduce fossil fuel generation, but real numbers are hard to come by.

Oct 30 11:16 AM

[Idiotbuster:]

The real problem with alternate energy is that they will eat up a lot of real estate .You will need something like 25 square miles of solar panels to generate equally with a coal fired powerplant or a hydropower dam or a nuclear reactor. Wind power is almost as bad as you can see them dotting all over.. The biggest wind turbine can power 2000 to 6000 households while wind blows. When wind stopped blowing, it stops and go. A coal powerplant with small footprint can power 500,000 to 1,000,000 households constantly. We havent even counted skyscrapers, factories, street lighting, retail stores/warehouses, etc. We are talking about a lot of solar and wind power to install and we are already talk about oversupplies of solar, DUH?

Oct 30 01:08 PM

[Idiotbuster:]

We are not going to make any dent with only rooftop installments. They will only displace a couple of coal powerplants at best. We need raw land where cattle roams to install far more solar panels. Ranchers and farmers are not interested so far.. They dont want them on their properties. Where in the heck do we put them?? Rooftops is nice and exciting , but will not get us far with stock prices.

Oct 30 01:11 PM

[Idiotbuster:]

I see a possibility in local municipalities that can find a few spare acres to install solar panels and sell electricity to the local utility for modest revenues. They can sell municipal bonds and apply for some federal and state assistance to finance a few megawatts that can pay $100-500 hourly to the municipal coffers as long as the sun shines. Or maybe new independent utilties will be formed to purchase properties and install solar panels and sell to local utilites. So far, it seems that $145 oil barrels failed to scare us up enough to act right away even though oil had fallen down again. It seems to me that most of us are thinking that we can afford to wait until we are hit with ever higher oil prices before we are convinced enough to throw in the towel. We will be piling ever more debt than ever. What we dont understand is that we should take advantage of low oil prices to start acting than later. This is not how capitalists think and behave. They are just too content to let oil prices go up to profit on before moving on to alternate energy. They dont care about people losing jobs, homes, cars, dogs and cats ... They just dont care,,

Oct 30 01:21 PM

[Troy Jensen:]

Just a few points from someone knee-deep in the industry the past few years...

1. German feed-in tariffs and other incentives indeed spurred the acceleration of solar energy projects in that nation, and they have a large number of roof-installed solar systems. Critics are always so fast to glance at a number or article and then convey them not as opinions, but as absolutes. But I suggest to be sure to do your due-diligence. Germany has horrid solar generation conditions, averaging only four sun-hours per day. So yes, it is not going to displace other traditional forms of energy generation. But be careful to state it has failed, because that was never the point. Germany made a strategic move in investing a lot of capital in solar energy generation - to attain industry leadership. Germany now possesses the intellectual property and the manufacturing and export capacity that is expected to make it one of the three dominant global players in an industry that will be worth tens of billion dollars a year. Even today, it already has over 50,000 employees in the solar industry.

2. Idiotbuster makes the statement "We are not going to make any dent with only rooftop installments." I have to bust Idiotbuster - I personally have dozens of rooftop installation projects I can show anyone anytime that have eliminated a homeowners entire energy bill. These installations were in Arizona and California, primarily in desert regions where averages of 7-8 sun-hours per day are common. So to take Idiotbuster's statement-of-fact further, indeed if we extrapolated that on a much larger scale, and there are several hundred thousand homes in the Phoenix metro area with rooftop installations that are 100% offsetting their energy bills, I can displace more than a "couple of coal powerplants at best." So that is indeed not an absolute fact - it's actually very much incorrect.

3. As far as overall return-on-investment, we have a program in place with realtors and have executed several successful case studies in Phoenix and Palm Springs that are clear in showing it has a significant ROI on a homeowners capital investment - better returns than most places you could deploy that capital in this economy. When you combine government subsidies that help offset a significant portion of the homeowners out-of-pocket up-front costs with the lift on property values in this real estate market (with 20-year warranties on the balance-of-systems, you are selling a home that does not have an electricity bill attached to it - a powerful hedge against future energy and inflation cost increases), the ROI is powerfully conclusive in these markets that residential solar installations are absolutely viable.

4. The longer-term outlook is cloudier. Government funding, as well as funding from the private sector, has been flowing strong into the solar industry. That is a leading indicator - "follow the flow,", as we say in Silicon Valley. But that isn't sustainable long-term - the key metric to follow is the LCOE (Levelized Cost-of-Energy), or LEC (Levelized Energy Cost), two different names for the exact same thing. It is an economic assessment of the cost the energy-generating system including all the costs over its lifetime: initial investment, operations and maintenance, cost of fuel, cost of capital. A net present value calculation is performed and solved in such a way that for the value of the LEC chosen, the project's net present value becomes zero. Typically LECs are calculated over 20 year lifetimes, and are given in the units of currency per kilowatt-hour, for example USD/kWh or EUR/kWh or per megawatt-hour. Solar's LEC must come down to the level of other, traditional energy generation sources for it to truly gain critical mass and the accelerated investment and deployment that comes with it.

5. Another powerful force isn't a quantifiable metric but must be factored when forecasting the solar industry, which is the cultural and societal push to renewable Energy, both domestic and internationally. The United States has been effectively put in the position of either taking over the leadership of the GreenTech sector, and the climate debate, as only the U.S. can do, or find ourselves behind Europe and Asia in a technology sector absolutely critical to the economy. And effectively there is no choice - whether you believe in global warming or Renewable Energy, we are jumping on the train because we must.

6. The Smart Grid's evolution and the corresponding innovations will have a dramatic effect on Solar's LEC. The Smart Grid is in its infancy, so we will see its impact on Renewable Energy sources and their net efficiencies over the next 5-10 years start to be realized.

7. The oversupply of solar panel units does indeed have an impact on First Solar, but it is a net-positive for the industry as a whole for obvious reasons. Case-in-point, China's Solar production capacity has increased substantially (both qualitative and quantitative, I have seen impressive bench test results from very low costs panels as compared to expensive established brands, and the build quality is impressive), and the impact of a downward pressure of solar panel components will continue to effect LEC in a positive manner for the solar industry as a whole (Note: I think if First Solar navigates current conditions effectively, they still have tremendous upside with their first-to-market leadership position in residential rooftop installations in the U.S. - in technology sectors, never discount FTM).

8. Finally, at least in the near-term, we have an Administration and Congressional body that, right, wrong or indifferent, is dedicated to continue investment substantial sums into the GreenTech industry, solar very much included. And the investment is coming both directly and in the form of subsidies and tax-credits. It's stunningly substantial when I can eliminate 75% of a homeowner's out-of-pocket initial costs of a rooftop solar energy system. That cannot be discounted, again in the near-term.

Just some thoughts to consider when you look at the solar landscape from a macro-level. I hope it is helpful!


On Oct 30 01:11 PM Idiotbuster wrote:

> We are not going to make any dent with only rooftop installments.
> They will only displace a couple of coal powerplants at best. We
> need raw land where cattle roams to install far more solar panels.
> Ranchers and farmers are not interested so far.. They dont want them
> on their properties. Where in the heck do we put them?? Rooftops
> is nice and exciting , but will not get us far with stock prices.

Oct 30 08:19 PM