First Solar Can Hit $144 With Rock Bottom Production Costs

Jul. 6.11 | About: First Solar, (FSLR)

First Solar (NASDAQ:FSLR) was displaced from its position as the largest manufacturer of solar modules in the world by its China-based competitor Suntech Power (NYSE:STP) in 2010. But it is still significantly ahead of all its competitors, which includes other solar sector giants like SunPower (NASDAQ:SPWRA), LDK Solar (NYSE:LDK) and Yingli Green Energy Holding Com (NYSE:YGE), when it comes to realizing the lowest manufacturing cost per watt of solar modules produced. In this article we detail why we believe First Solar will continue to derive most of its value from its low manufacturing costs.

We have a price estimate of $144 for First Solar’s stock, which is above the stock’s current market price.

First Solar was the first to break $1 / watt

Based on data provided in the company’s annual reports, the average manufacturing cost per watt for First Solar modules has declined steadily from $1.47 in 2005 to $0.75 in 2010. This can be primarily attributed to economies of scale and improvements in the firm’s technology and manufacturing process over the last several years. Moreover, the cost advantage that thin film technology provides over traditional crystalline silicon solar module manufacturers has also contributed to the low costs.

Chart created using Trefis' app

… and it continues to push cost figures

First Solar continues its focus on cost reduction with the management taking several steps to further reduce costs over the years to come. It has an inherent competitive advantage due to its use of Cadmium Tellurium (CdTe) in its panels instead of crystalline silicon (polysilicon) used by almost all its competitors. Thus it is able to produce cheaper panels than anyone else and directly benefits from the lower raw material and production costs. It continues to spend on R&D to further reduce its panel production costs.

The company has also focused on expanding manufacturing capacity in low cost manufacturing locations – with a huge chunk of production operations in Malaysia and Thailand. These continuing efforts have led to the management estimating per watt manufacturing costs between $0.52 and $0.63 by 2014 – making the company’s solar modules cost-effective enough to take non-renewable sources of energy like coal and natural gas head-on.

You can clearly understand the impact of low manufacturing costs on our $144 price estimate for First Solar by making changes to the chart above.

Disclosure: No positions