Troubled Times Ahead For First Solar?

Mar. 3.14 | About: First Solar, (FSLR)

After putting in a terrific performance in 2013, First Solar (NASDAQ:FSLR) is having a torrid time this year. The company's shares slid around 9% when it announced financial results for the fourth quarter. First Solar's performance took a solid beating as a result of a decline in revenue from utility-scale power plants, and the company's outlook also fell below expectations.

Analyzing the quarter

First Solar's net sales were $768 million in the fourth quarter, a decline of $497 million on a sequential basis. This massive drop was due to lower systems business project revenues, since the initial revenue recognition for Desert Sunlight and the sale of the ABW projects were achieved in the third quarter.

But it was the outlook which was disastrous. First Solar expects revenue of $800 to $900 million in the ongoing quarter, while EPS is expected to come in at $0.50 to $0.60. When compared to the Street estimates of $898 million in revenue and $0.84 in earnings, this is certainly a very bad forecast. But, since solar power is gradually gaining momentum in the U.S. and across the world, and since First Solar is a strong player in this arena, is it a good long-term buy?

Positives worth noting

First Solar reached a new milestone of 20.4% CdTe cell efficiency, breaking the record of 19.6% set by GE Global Research in 2013. Also, the company is witnessing improvements in CdTe photovoltaic performance at a rate that outpaces the trajectory of conventional silicon technologies. So, First Solar's development of advanced technologies, processes, and strong investment in R&D should positively impact the performance of its production modules and power plants in the future.

The benefits are already there to see as First Solar's average cost per watt declined to $0.63 from $0.70 in 2012. Average efficiency rose to 13.2% in 2013 from 12.6% in 2012.

Moreover, efforts made by First Solar's global project and business development teams have resulted in a strong pipeline of solar projects. Total outstanding bookings rose to 2.7GW DC in 2013, leading to a book to bill ratio of just over 1.

First Solar's new bookings consisted of a 150MW AC solar power plant in California. It has also signed PPAs with member cities of the Southern California Public Power Authority for electricity to be generated at the 40MW Kingbird solar power plant in Kern County, California. In addition, First Solar booked a 22MW project to be developed, constructed, and owned by it in Pecos County, Texas. Texas represents 10% of the total energy consumption in the U.S, so this is a good move by First Solar to tap the largest electricity market in the country.

This project is expected to be complete by mid-2014, and should enable First Solar to be a leader in this key developing market. The company is looking to sell energy into the market in real-time and capture revenue from spot market price spikes triggered by capacity shortages.

Increasing opportunity and efficiency

First Solar's total opportunity in solar rose significantly to 10.6GW during the quarter, primarily due to the inclusion of sites in Japan, along with other global regions. According to the company, early stage opportunities have risen to 9.5GW, which means that the majority of these projects will have a development cycle of one to two years. Given First Solar's focus on international markets, it wasn't a surprise to see that it has an opportunity of 5.9GW opportunity outside the U.S., a significant increase on the prior quarter. This represents 56% of the total opportunity.

First Solar has also made great progress toward achieving efficiency and module manufacturing cost targets. Module manufacturing costs per watt dropped to $0.56 from $0.59 last quarter, a 5% reduction quarter on quarter. This was primarily driven by striking a balance between efficiency gains, throughput improvements, and variable cost reductions. However, investors shouldn't ignore the drawbacks that could come along with an investment in First Solar.

Concerns

First Solar is a profitable company, but its low efficiency business model will restrict it from over taking peers. The company's gross margin dipped drastically year-over year, from 27.4% to 24.6%, while plant utilization stood at a mere 83%. In addition, conversion efficiency dropped to 13.4% in the last quarter, which usually remains in the range of 15% to 18% for any other quarter.

First Solar is looking to solve these problems by developing improved CdTe panels, which have a record 20.4% conversion efficiency. If CdTe doesn't live up to its expectations, First Solar will focus its attention toward TetraSun. The company acquired TetraSun in early 2013, and it promises to have developed a silicon cell architecture which offers 21% efficiency at lower costs. However the company's lead production line still runs at 14.2% efficiency and it will take time before things pan out for this solar player.

Conclusion

First Solar's shares bounced 7% after Baird upgraded it from neutral to outperform. However, I will recommend investors to stay clear of this stock till the company finds a solution for its low efficiency modules. The company undoubtedly looks cheap at 15 times trailing earnings, but its earnings are expected to decline at a CAGR of 0.70% in the next five years. So, investors looking to benefit from solar's growth should consider other stocks such as SunEdison (SUNE) or SolarCity (NASDAQ:SCTY) for the time being.

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.