First Solar Earnings Preview: Large U.S. Projects To Drive Results

May. 5.14 | About: First Solar, (FSLR)

Solar bellwether, First Solar (NASDAQ:FSLR), is set to release its Q1 2014 earnings on May 6. We expect the company's results to be influenced by the execution of its large scale solar projects in North America, lower panel manufacturing costs and possibly better pricing conditions in the global solar markets. During Q4 2013, the company's quarterly revenues were down by around 29% year-over-year to $768 million, while operating income fell to about $60 million from around $172 million. Since the company's quarterly financials are typically subject to some volatility given its exposure to the solar projects space, this pre-earnings note focuses on some of the broader trends that could drive the company's performance.

We have a $53 price estimate for First Solar, which is about 20% below the current market price. We will be revisiting our price estimate after the earnings release.

Utility Scale Projects Will Drive growth

First Solar has a total of about 3.8 gigawatts (GW) of advanced stage projects in its pipeline. We expect revenue recognition on the company's Topaz and Desert Sunlight projects to be the primary earnings drivers for this quarter. Both projects are located in California and have generation capacities of around 550 megawatts (MW) each. As of Q4 2013, First Solar had recognized around 72% of total revenues from the Topaz project that is being built for MidAmerican Renewables, and about 62% of revenues for the Desert Sunlight project.

Project executions aside, the book-to-bill ratio will be a key metric to watch. For 2013, the company executed about 1.6 GW of project orders, while adding around 1.7 GW of new bookings, translating to a book-to-bill ratio of slightly over 1. However, we think that there is a possibility that this could deteriorate, given the slower pace of contracting activity for projects in the United States, which is First Solar's bread-and-butter market (see Why The U.S. Utility Solar Market Is Slowing Down). However, First Solar does intend to ramp up its portfolio of international power plant projects, indicating that it has about 5.9 GW of potential booking opportunities overseas. (First Solar Q4 2013 Earnings Call Transcripts, Seeking Alpha, February 2014.) However, it could take some time before the company converts these leads into contracts.

Drivers For The Panels Business

Although First Solar's standalone panel sales are currently just a fraction of project sales, the company's panels remain an important factor in driving its competitiveness in the projects business, where it faces an increasing threat from Chinese manufacturers. Some key metrics to watch include manufacturing costs, conversion efficiencies and pricing. During 2013, the company's panels had an average conversion efficiency of around 13.2%, and the company expects this number to improve to around 14.1% for 2014. The company also expects to reduce the core manufacturing costs of its panels to less than $0.50 per watt this year, driven in part by better utilization of its manufacturing facilities, better efficiencies and some variable cost reductions.

First Solar could also possibly have more room on the pricing front, as panel demand has been soaring (global demand grew by around 35% year-over-year to around 9 GW during Q1) while supplies have been growing at a slower pace due to capacity constraints. For instance, Tier-1 Chinese solar players have seen average selling prices rise by around 9% year-over-year during Q1. This could give First Solar some room to improve margins for panel sales to third parties.

Disclosure: No positions