First Solar's (FSLR) shares rose by 21% yesterday, as a company official reported about First Solar's European plants running at full capacity because of a strong, unexpected demand from Europe.
Investment Thesis
We expect First Solar to achieve year-end, management-guided EPS of $4.00-4.25 due to a high unexpected European demand. It can best the analyst estimates of $4. Also, yesterday's 21% surge in stock price can trigger a much bigger short squeeze as 43% of its float is short and it has a high short ratio of 3.6. We recommend a short term buy.
However, in the long term, we doubt First Solar ability to grow as the company failed to take advantage of robust growth in the U.S. solar industry in 1Q2012. First Solar revenues rose marginally in the U.S. solar industry's second fastest growing quarter.
Industry Overview
The photovoltaic (PV) industry is growing swiftly in the United States because of declining prices and excess supply. Furthermore, heavy competition among producers has fueled vertical expansion and consolidation among industry players. In this highly competitive environment, companies in developed markets are facing a declining growth as low cost Chinese producers have snatched the market share. The U.S. government's decision to levy duty on Chinese solar imports will change industry dynamics as both the prices and supply will be affected. Chinese manufacturers can shift their focus toward rising demand internally within China.
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The Company
First Solar manufactures and sells thin-film semiconductor technology, and designs, builds and sells PV solar power systems. The company is focusing on cost reduction in the solar power module, balance of systems, inverters, and other related equipment in an effort to make solar energy more affordable. First Solar has two primary business segments. The first segment, components segment, designs, manufactures and sells solar power modules. The second segment, systems business, constructs PV power plants. First Solar is the largest producer of thin-film PV cells and has an estimated electricity production capacity of 2000MW. It has one of the lowest production costs per watt in the industry ($0.74/watt) because of its cost effective thin-film technology.
Restructuring Plan
First Solar, in December 2011, announced a major restructuring plan which is intended to accelerate reduction in operating costs and improve operational efficiency. In an effort to reduce production costs and enhance competitiveness, First Solar decided to shut down its German production plant in the fourth quarter of 2012, reduce the number of operational lines in Malaysian plant, and reduce the U.S. and European headcount. The restructuring is expected to save company $30-60 million in 2012, and $100-120 million in coming years. The restructuring is expected to put pressure on company's cash reserves (est. restructuring cash outlay of $80-$120 million vs Cash reserves of $750 million).
Financial Review
First Solar sales decreased 25% QoQ and 12% YOY in 1Q2012, as a result of lower PV sales volumes and falling ASPs. Restructuring charges trimmed down the EPS to a loss of $5.20/share compared to a net loss of $4.78/share in the last quarter. However, First Solar still has a strong backlog of large scale solar projects which can provide steady profits in coming quarters, including the 550 MW Topaz plant that just started construction, Reuters reported. Also, the restructuring program will help the company in lowering down production costs to nearly $0.69/watt, the lowest in the industry.
Furthermore, current year's first quarter results show that First Solar was unable to take advantage of a strong solar energy industry growth as the U.S. industry recorded 502 MW of solar installations, the second highest number of installations in a quarter in United States.
It is also worth noting that the cell efficiency of First Solar is low as the company uses thin film technology to manufacture PV panels. The company is expected to achieve a 12.6% efficiency level in 2012. On the other hand, PV producers, who use crystalline silicon manufactures, are expected to achieve efficiency in the range of 14.4% - 20%.
Valuation
First Solar shares have lost 58% this year because of the poor future prospects in the light of an increasing competition from falling polysilicon prices. The company's stock was the worst performer in S&P 500 last year. The stock is currently trading at forward earnings multiple of 3.78x, at a significant discount to its rivals SunPower (SPWR) and Trina Solar Limited (TSL).
FSLR | SPWR | TSL | |
FORWARD P/E | 3.7x | 11x | 39x |
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Future Outlook
We expect First Solar to achieve 2012 guided EPS of $4.00-$4.50 and revenue growth targets due to a rise in demand from European plant. However, the company was unable to capitalize on the surging demand in USA in 1Q2012. Therefore, we are doubtful if the company will be able to sustain the short term expected surge in growth. In addition, the imposition of recent tariff on Chinese producers is not expected to help First Solar as Chinese companies have indicated to shift cell production outside of China to avoid tariffs. Though, in the short term, we expect the share prices to go up as a result of a short squeeze.
We will be publishing a detailed analysis on the Solar market and will identify stocks that are best positioned to benefit from an industry turnaround.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
