First Solar's (NASDAQ:FSLR) stock has been on a tear, rising by close to 20% over the last two weeks, after the company provided stellar financial guidance for FY 2015 and 2016, targeting an EPS range of between $4.50 and $6 (versus a consensus of under $4 per share), and $3.50 to $5, respectively. However, the company's bullish outlook comes at a time when its primary business of building utility-scale solar power plants in the United States has showed some signs of slowing down. This is likely to impact First Solar, since it derives over two-thirds of its revenues from utility-scale projects. In this note, we take a look at some of the additional avenues that First Solar is likely to pursue in order to drive earnings growth over the long term.
Trefis has a $53 price estimate for First Solar, which is about 20% below the current market price.
U.S. Utility-Scale Market Poised To Slow Down As Utility Companies Meet RPS
Utility-scale solar installations in the United States grew by nearly 58% in 2013 and accounted for nearly 60% of total solar installations. However, activity has been slowing down of late, with installations outpacing new bookings, particularly for the largest and most lucrative projects with sizes above 200 megawatts (MW). This is because many utility companies have already met or even exceeded their state-mandated renewable energy portfolio standards, which require them to derive a certain percentage of their electricity from renewable sources. Additionally, identifying suitable land with good solar resources and a proximity to transmission lines has become a problem. It takes as long as three to five years to identify a site and gain necessary approvals to construct a solar project.
Panel Efficiency Improvements : Rooftop Solar Market To Drive Market
According to a report by Goldman Sachs, installations of utility-scale solar projects in the U.S are expected to grow at just 8% from 2013 to 2016, while the rooftop solar market will grow at a rate of about 45% over the same period. This makes the rooftop market an important growth driver for solar companies.
Until now, First Solar's presence in the rooftop solar market has been small due to a lack of high-efficiency panels in its portfolio. However, this could change with the company's new panel efficiency roadmap, which indicates that module efficiencies could improve to around 14.9% this year while rising to around 19.5% by 2017. Its previous roadmap targeted a 17.2% efficiency in the same timeframe. The company also expects the efficiency of its modules to equal those of polycrystalline modules by the end of 2015. Higher panel efficiencies would mean that the company could command more attractive pricing for its panels. The higher efficiencies will help to cut production costs as well, since the company would require a lower quantity of raw materials to manufacture each watt of panels.
The company will also be diversifying its product portfolio to include polycrystalline panels, which it will be producing using technology acquired with its purchase of TertaSun last year. TetraSun panels are suitable for smaller installations such as homes. First Solar expects to commence production of its polysilicon panels by the end of 2014. The company has noted that its capacity was already sold out through the first quarter of next year.
Focus On Commercial And Industrial Segments
Solar installations are attractive to industries and businesses, since most businesses see strong power consumption during the daytime, when solar power is abundant. Additionally, distributed solar power is sometimes cheaper and has no transmission losses, unlike power from the grid. The commercial and industrial rooftop segment is an important component of the global solar market and is expected to grow from around 15 GW in 2013 to around 25 GW by the year 2016. The segment is expected to account for close to 47% of the total addressable solar market in 2016. First Solar intends to significantly ramp-up its presence in this space and has indicated that it was bidding for about 15 commercial and industrial projects, with a total capacity of around 45 GW. The company has already been shortlisted for about five projects.
International Utility-Scale Opportunities
First Solar also plans to ramp up its presence overseas, particularly in markets such as Jordan, Saudi Arabia, India, Africa and South America, where utility-scale solar is still in its infancy. The company currently has about 5.9 GW of potential booking opportunities overseas. First Solar's panels could have a competitive advantage, particularly in markets such as the Middle East and India, since the Cd-Te thin-film panels that the company produces have a superior temperature coefficient, meaning that they outperform comparable silicon-based panels under extremely hot temperatures. First Solar also intends to reduce the installed costs of its systems from around $1.59 in 2013 to under $1 per watt (including panels, racking systems and inverters) in 2017. A continual decline in systems costs could help the company capture more market share from traditional generation sources in emerging solar markets. Additionally, the company's diversification into the polycrystalline panel space through Tetrasun could give it a better position in markets such as Japan, where high-technology panels are valued.
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