Buy First Solar On Top-Line And Bottom-Line Performance

Feb.11.14 | About: First Solar, (FSLR)

First Solar, a specialized semiconductor company, has been showing revenue growth in the recent past. Unlike other solar stocks, FSLR managed to post a positive EPS in the fiscal 2013. The company has a healthy balance sheet as compared to the industry. It is consistently reducing the cost per watt of its thin film technology cells. Moreover, the thin film cells are more suitable to work in high temperature conditions. The company also has a healthy project pipeline of around 1.9GW.

Introduction

First Solar Inc. (NASDAQ:FSLR) is an Arizona-based company engaged in the designing, manufacturing and distribution of photovoltaic (PV) solar modules to residential and commercial customers. The company operates in two segments; components and systems. The components segment is concerned with the designing, manufacturing and sale of solar modules whereas the systems segment distributes PV solar systems to utilities and independent electricity producers. The systems segment also provides construction, maintenance and procurement of solar power plants. First Solar has experienced a very good year in terms of projects as well as stock price posting a 54% growth in share price.

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Fundamentals

The company performed well during the third quarter of 2013. It reported an increase of 143% in revenues (quarter over quarter) which led to a net income of $195 million. This was a stellar quarter for the company as it also showed a significant growth in cash and cash equivalents, reporting $264 million which is 207% greater than the cash in the second quarter of 2013; while at the same time being able to maintain the debt level due to a 143% increase in sales quarter over quarter. In addition, First Solar was also able to decrease its cost per watt to $0.49 (inclusive of freight, recycling and warranty charges) which is $0.08 less than the cost in the second quarter of 2013. This is the lowest cost per watt in the US industry. Furthermore, the company increased its production by 10% to close at 426MWDC.

Company

Industry

Sector

Quick Ratio

1.92

0.59

1.47

Current Ratio

2.20

0.90

1.70

Gearing*

3.68%

55%

-

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*calculated using balance sheet figures of solar industry companies.

First Solar has a solid financial outlook, with current and quick ratios almost double the industry average. Moreover, such low levels of leverage (gearing) present a dual opportunity for the company. Firstly, it has the ability to raise a considerable amount debt in case new projects come up and by doing so, the company will effectively decrease its cost of capital and increase its net present value.

Acquisition and Sales

In August 2013, First Solar sold off its assets in Canada to the GE-Alterra partnership. These consisted of Amherstburg, Belmont and Walpole that are generating a total of 50 MWAC electricity which will distributed to the Ontario Power Authority under its Renewable Energy Standard Offer Program (RESOP) with a 20-year Power Purchase Agreement. However, even after the sale of these assets the company will be providing operation and maintenance services under the long-term agreement. This sale provided First Solar with an infusion of approx. $115 million and helped it to decrease the annual operating costs by around $10 million.

The company also sold the 250MWAC Silver State South Solar Project, which is located in Nevada, to a subsidiary of NextEra Energy Resources located adjacent to the 50MWAC Silver State North project also built by First Solar. The sale of this project is expected to be completed in early 2014, subject to certain conditions, while further transaction details have not been released. Even after the divestment, the company will be providing Engineering, Procurement and Construction (EPC) services for the Silver South Solar project. Construction will be started after regulatory and permitting approvals are received and are set for completion by the end of 2016.

Through these sales, First Solar has not only brought cash into the business but also reduced operating costs. The company will be providing EPC services, meaning that it will still be earning from these projects without incurring any costs; this will have a positive effect on both revenues and expenses.

New Projects

First Solar Inc. acquired the Moapa Project in Nevada from K Road Power Holdings at the end of the third quarter of 2013. This project has the capacity to produce 250 MWAC which will be distributed to the Los Angeles Department of Water and Power (LADWP) as per the 25-year Power Purchase Agreement. The company will be designing and building the project using its Cadmium Telluride (CdTe) thin film solar modules. CdTe technology has given the company an edge over its competitors due to a better efficiency at high temperatures. The project is expected to be completed by the end of 2015 and has the capacity to provide electricity to 100,000 homes during its first year of operation alone.

Before the sale of the Silver State South Solar Project, First Solar signed an agreement to build a 250MWAC solar power plant in California for NextEra Energy Resources. This is the McCoy Solar Energy Project which will be located on approx. 2,300 acres of land and First Solar will be providing Engineering, Procurement and Construction services (EPC). Construction is expected to start in late 2014 and completed by the end of 2016.

The company also signed a 20-year Power Purchase Agreement with member cities of Southern California Public Power Authority (SCPPA); Pasadena, Riverside, Colton and Azusa. Under his agreement, the company will be selling a total of 40MWAC electricity generated from Kingbird PV Solar plant; 20MWAC to Pasadena and 20MWAC to Riverside, Colton and Azusa combined. The construction is expected to be started in mid-2014 and completed by the end of 2015.

After these projects are completed, the company will have the option of either running the solar plant or selling it. If it plans to operate these plants, it can easily earn revenues through the power purchase agreements that are already in place with respective parties, assuring revenue generation. However, the plants won't start paying off until 2016.

Other Developments

At the end of October 2013, the company was able to complete its Dubai solar project within 30 weeks. This plant is expected to produce 24 million kilowatt hours per year making it the largest solar PV plant in the region. The plant will be supplying electricity to the Dubai Electricity and Water Authority (DEWA) and First Solar will be providing the EPC services. This 13MWDC plant is just the first phase of a 1000MW project which will be achieved by using both PV and solar thermal technology over a period of 25 years.

First Solar strengthened itself globally at the end of the third quarter of 2013 by signing a joint venture with the BELECTRIC Holding for developing solar projects in Europe, North Africa and the US. Under this venture, First Solar will be providing advanced thin film modules, First Solar Tracker and other value added services while BELECTRIC will provide Balance of Systems (BOS) and other service capabilities. Both companies have worked together before as they recently inaugurated the 128MWp Templin solar power plant in Germany; 80% of the 1400MWp of the plant's solar electricity generation is powered by First Solar's modules. However, the joint venture is awaiting approval from the relevant governmental merger control authorities.

Valuation

Current EPS of the company is $5.31 while the P/E ratio is 9.8. The P/E ratio is expected to go up in 2014 to 15.2 which shows that investors are expecting a higher growth from the company, indicating an anticipated increase in the share price.

Valuations

EPS ($ billion)

PE (X)

Price Target ($)

High

3.98

21

83

Mean

3.41

21

71

Low

2.48

21

52

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*price targets using 21x multiplier

The price target using P/S ratio tells a different story. We arrived at a price target using an average of P/E-based and P/S-based valuation techniques.

Currently the share is being traded at around $49 and according to our estimates the average price in 2014 will be around $63 per share (average of P/E and P/S price targets). However, the price can rise to as high as $83 during the fiscal year 2014. The company showed a 71% growth in its share price during 2013 and we expect more growth this year due to improving profit margins and favorable market conditions fuelled by the increasing demand of solar products.

Conclusion

China has the ability to carry out mass production of PV modules due to a stable demand and cheaper materials that has decreased the cost per watt to $0.53, as reported by Yingli Green Energy (NYSE:YGE). This has not only created a supply glut, but has also made it difficult for US firms to compete with China in the solar market. However, First Solar has been able to decrease its cost to $0.49 per watt (excluding freight, recycling and warrant charges) and is planning to reduce it a further 21% by 2015. Furthermore, the price of polysilicon, which is the key raw material used in the manufacturing of silicon-based modules made by China and accounts for 20% of the total manufacturing cost, is expected to rise in the future by approx. 25% due to an increasing global demand for solar panels. While First Solar is busy decreasing its expenses, the costs for Chinese firms are expected to increase. This will have a positive impact on First Solar's demand as it uses the cdTe technology which won't be affected by polysilicon prices. The company is also improving the conversion efficiency (sunlight to electricity conversion) of its solar panels and has reached 13.9%, expecting to increase it to 17% by 2016 whereas China's polycrystalline panels have a conversion efficiency of around 16%. In short, silicon price movement, suitability of cdTe in high temperature scenarios, a healthy balance sheet and strong project pipeline make First Solar a quality investment for the long term.

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.

Additional disclosure: Equity Flux is a team of analysts. This article was written by our Technology analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.