- First Solar is delivering operating efficiency improvements, which should allow it to tap a bigger share of the solar market.
- First Solar has made key acquisitions and it is not surprising that its addressable market is increasing.
- First Solar's valuation is attractive, and its bottom line is expected to grow at an impressive pace going forward.
The solar market is growing at a fast pace, and First Solar (NASDAQ:FSLR) is making the most of it. The stock has gained 24% in 2014, and looks set to scale greater heights, although its recent results showed slow revenue growth and a drop in earnings. In fact, First Solar announced net sales of $544 million for the second quarter, a decrease from $406 million in the first quarter of 2014.
Its earnings per share of $0.04 was lower than $1.10 in the first quarter of 2014. However, investors should not read too much into this drop, as the lower earnings and revenue were due to the sale of the Campo Verde project during the first quarter, along with certain project delays. But, First Solar saw better operating efficiency during the quarter, leading to a drop in operating expenses. This indicates that First Solar is focusing on efficiency, and this should help the company attack the solar market more profitably in the future.
Focus on efficiency
In fact, First Solar reached a new world record for CdTe cell efficiency of 21%, driven by the seventh update to CdTe cell efficiencies since 2011. It also broke the 10-year-old multi crystal and silicon record of 20.4%, and the present record of CdTe of 20.9%. The average efficiency of First Solar increased in the range of 0.5% to 14%, which is the largest increase in efficiency in a single quarter since it became a public company. Looking ahead, the lead line efficiency during the fourth quarter is expected to be 14.6%, which signifies that further improvements are on the way.
Moreover, CdTe technology holds advantages in key areas including humidity, temperature, and shade tolerance. So, it is expected to add further efficiency advantage over its multi-crystalline competitors.
Looking ahead, First Solar plans to evolve its operations and maintenance (O&M) business into a global third party provider of services. The company seems to be moving quickly in that direction with its recent acquisition of Skytron Energy.
With this acquisition, First Solar will be able to more than double its global portfolio of monitored assets and enable strategic positioning in the European O&M market, which is forecasted to reach 35 gigawatts by 2017. Skytron has a total installed capacity of 5 gigawatts, having "installed monitoring and control systems in more than 600 plants across 27 countries." Apart from the Skytron acquisition, its core O&M business is growing at a good pace, delivering year-to-date bookings of over 800 megawatts.
Moreover, First Solar's bookings are growing at a good pace. In the previous quarter, its total outstanding bookings expanded from 2.7 gigawatts to 3.2 gigawatts. First Solar's largest booking was from SoCal Edison of around 310 megawatt AC DPA for the quarter, which is expected to start its commercial operations in 2019.
First Solar also signed an engineering, procurement, and construction (EPC) contract for constructing a 175 megawatt AC project in California to start its commercial operation in 2016. These wins add to First Solar's pipeline and highlight its continued strength in the Southwestern United States.
Expanding its reach
First Solar is also moving into new markets, and achieved a key milestone by declaring its first self-developed projects in India. It plans to start the construction on numerous projects this year, totaling 45 megawatts AC. These projects present an opportunity for the company to improve its development and EPC experience, which will allow it to tap the emerging solar market in India.
Moreover, First Solar recently signed a supply agreement with XSOL, a key integrator and distributor of solar systems in Japan. Through this agreement, First Solar aims to install 100 megawatts DC per year of its cad-tell thin film module in Japan.
In addition, the potential booking opportunities for First Solar have increased from 12.2 gigawatts in the first quarter of 2014 to 12.7 gigawatts DC in the second quarter of the year. This nearly 500 megawatt increase in new opportunities is mainly due to robust growth in the U.S., along with new opportunities in Latin America. The growth In the U.S. is from projects in the Southwest, apart from rising utility scale demand across the country.
Valuation and conclusion
First Solar is also impressively valued, especially considering its growth prospects. It has a trailing P/E ratio of 16.7 and a forward P/E ratio of 15, indicating earnings growth. Also, it is cheaper than the industry's average P/E of 23. As its bottom line is expected to grow an impressive 76% next year, it could prove to be a good bet at the current levels.
Hence, investors should continue betting on First Solar as it can deliver strong growth in the long run.