First Solar Inc. (FSLR) is a global provider of comprehensive photovoltaic energy solutions. The company operates in two major segments: components and systems. The components segment of the business involves the designing and manufacturing of solar panels; and their supply to a wide range of customers. A portion of these panels are utilized internally within the systems segment. This segment of the company is concerned with providing turnkey photovoltaic systems to its clients. First Solar's clients include independent power developers, investor owned utilities, commercial and industrial companies, system integrators and operators of renewable energy projects. Furthermore, the company holds a major market of solar panels in Germany and France, which facilitates it to generate around 45% of its revenue from outside the United States. During the last year, the company generated 64.8% of its sales from the systems segment and 35.2% from the components segment. First Solar's revenue generation has been gradually shifting towards the components segment over the years.
Shares of First Solar Inc. are listed on NASDAQ and are trading at around $60 per share. The company's stock was trading at around $160 per share back in 2011 but fell significantly due to the oversupply of solar panels, resulting in an overall price decrease and reduced profit margins. This is evident from the EPS performance of the company in the last couple of years. In the first quarter of 2013, the earnings guidance was an improvement on the analyst estimates; this spurred the investor's perspective in a more positive direction and the shares began to rise again. In the third quarter, the company posted an EPS of $2.28, again beating the estimates of analysts, which stood at $1. The company posted positive earnings in the previous three quarters of 2013. These recent events are reflected in the current share price. The following table shows the revenue and EPS trends of the company.
Industry growth prospects
For the past couple of years, the solar industry has been in turmoil. The oversupply of PV (photovoltaic) panels deteriorated the market conditions by reducing profit margins. It seems, however, that the industry has now entered a recovery phase. IHS predicts that annual solar installations will expand by 18% in 2014. The output of these installations will reach around 41GW and mark an end to the two slow years of the solar industry. "The market is continuing to grow, there's no questions there," said Shayle Kann, vice president at GTM Research. "The growth is certainly more incremental than it used to be. We're used to seeing the market doubling; we're past the point where that is happening."
In addition, the European Union (EU) has already set a goal of meeting 20 percent of energy demanded through the use of renewable sources, by 2020. This policy will also provide an impulse to the growth of the solar industry.
The rooftop solar market is likely to grow from 15,941 megawatts to 26,732 megawatts (GTM). It seems that the future of the solar industry is bright in terms of growth but one more fact requires consideration; the role of the US in the global renewable energy scenario is declining. Even though photovoltaic installations in the US doubled during the last two years, the additional capacity is still less than a third of that added by Germany, China and Italy.
Overall, the growth prospects of the industry seem promising but the recent developments indicate that American companies will face fierce competition from around the globe. The future of solar companies in the US depends upon the cost effectiveness and efficiency of their solar technology.
First Solar acquired TetraSun earlier this year, a company that specializes in silicon-based cells. This acquisition helps First Solar to penetrate the silicon based solar cell development, from which the company has been facing competition in the past. Silicon based cells are a cheap alternative and can help the company to compete on the basis of cost efficiency. The strategic acquisition of TetraSun's technology will enable First Solar to produce solar panels with up to 21% efficiency. The problem, however, is that such panels are already available in the market. Even if First Solar succeeds in producing more efficient solar panels, they will not be differentiated from what the competition is offering. This acquisition does position the company to compete in the silicon based solar panels industry. Will it be able to compete adequately? It is highly dependent on the efficiency and cost of production of the panels.
In August, First Solar and General Electric announced a technology partnership to advance thin-film solar cells and modules. Both companies will collaborate in the research of CdTe solar technology. This partnership will also allow First Solar to acquire General Electric's CdTe solar intellectual property portfolio. "We're working with First Solar to move our technologies forward together" The President & CEO Renewables at GE Power & Water, Anne McEntee said. Visibly, the company is working actively to make improvements in technology and production.
First Solar's revenues have seen a positive surge in the current quarter because of roughly half of the revenue recognition of the desert sunlight project. This indicates that revenue will grow in the coming year as well and there is a good chance that the EPS will beat the targets.
Overall, the company is well positioned in the solar energy market. In spite of facing intense competition in the components (panel manufacturing) industry, it is relatively stable because of the sales and profit being generated from the systems segment. Even though it is difficult to judge whether First Solar will be successful in the components market, we can safely assume that it will continue to grow in the systems segment. If the strategic deals with General Electric and TetraSun pay off, First Solar could manage to become a leader in solar panel efficiency and cost savings.
The EPS of First Solar Inc. stands at $4.35, which is expected to shrink to $3.79 in the coming year. The P/E ratio of the company stands at 17.98, which is adequate as far as the solar industry is concerned. We will value the company using a 21x multiplier rather than 17x because the company has been active and performing up to the mark recently. We are valuing all other solar stocks with a P/E of 30x but have used a lower P/E for First Solar due to its negative growth expectations for the coming year.
The price target valuation derived a mean price of $72, which is high when compared to the current price. The model predicts that the share price will rise in the future.
The solar industry is recovering from the effects of oversupply and slow growth. Statistics and estimates point to an increase in the growth rate of the industry in the future; a growth of 18% is expected in 2014. The European Union's goal to meet 20% energy demand through renewable energy sources will also foster this growth. However, the American market is not experiencing a growth at pace with the rest of the world. American companies will only succeed if, and only if, they succeed in developing more efficient and cost-effective cells.
In our view, First Solar has been farsighted enough to gauge this situation and secured strategic partnerships with TetraSun and General Electric. This is their big step towards the development of cost-effective solar panels with high efficiency ratings. It will still take some time for the company to grow in the components segment even if the agreements with TetraSun and GE prove successful and revenues from the systems segment continue to support the company's stability. As the systems segment makes up the majority revenue of the company and they have many projects in the pipeline, they should be successful on this front.
To conclude, there is a high probability of First Solar being successful in the future on both the components and systems front. The company's shares will appreciate in the future and our price valuation target affirms that shares have an upside of around 20%.
- Chinese companies can reduce prices even further and put First Solar in a difficult situation.
- As most of the sales are in Germany, depreciation of the Euro could erode sales.
- The company still faces the risk of oversupply.
- The company has a handful of large customers. Losing a single customer can affect earnings and, hence, the share price.