First Solar, Inc. (FSLR) halted deliveries for the Agua Caliente project because it was ahead of schedule. The shutdown caused shares to drop. The 19% drop in First Solar shares last was overdone, and gives investors an entry point in accumulating a long-term bullish position.
The oversupply condition in solar energy will continue to be a challenge for all solar energy players for many quarters. First Solar said during its most recent quarterly conference call that the industry saw an increase in bankruptcies and consolidations, but that existing players were increasing supply.
Adding to the sector's troubles was a decline in subsidy in Europe, a condition that is hurting the weaker players. Similar to companies like Trina Solar Limited (TSL), First Solar is undergoing a restructuring to adapt to the highly competitive environment.
Why First Solar is a Preferred Play
The weak sector could mean further losses for investors exposed to the solar energy sector, but First Solar is a long-term play. The company plans to ride out the weak market by creating a nascent market in emerging markets. First Solar aims to gain 20% of the India market, develop a combined 159 megawatts in Australia, and build an additional 139 megawatts in Imperial County, California.
Second Quarter Results:
- Net sales of $957 million, up from $497 million
- 369 megawatts produced
- Gross margins of 25.5%
- Expenses dropped to $104 million $1.27 earnings per share
- Cash and marketable securities balance of $744 million
- Accounts receivable declined by $172 million
- Net debt declined by $345 million to $519 million
- Operating cash flow was $428 million
- Average conversion efficiency was 12.6%
Second quarter results for First Solar benefited from $401 million in restructuring already realized in previous quarter. Revenue was much higher in the quarter, accounted for by project activity to-date, as opposed to project by quarter.
Second Quarter Weaknesses:
- Cost per watt was $0.72, up $0.02 from the previous quarter
- Higher costs due to underutilization of plants
- Full utilization would have reduced costs to $0.64 per watt
- Utilization rate was 63% of capacity, down 27% from previous quarter
Despite the under-utilization of its plants, First Solar expects total 2012 bookings to be close to 1 gigawatt. The company provided additional details in its forecast.
- Net sales of $3.6-$3.8 billion in 2012
- 1.8-1.9 gigawatts demand for 2012 increase due to rising demand in India and Europe
- Earnings per diluted share of $4.20 to $4.70 , up from $4.20 to $4.70
- Cost of $1.15 to $1.20 per watt by 2016, and a return on invested capital ("ROIC") of 13% to 17% in 2016.
- $510 million in restructuring charges ($425 million to-date) anticipated
- Revenue for Topaz project will be recognized in Q4
- Operating cost reduction by $100-$120 million, with manufacturing costs to be from $0.70 to $0.72 per watt
- 90% capacity utilization in second half
First Solar anticipates it will earn $3 in the second half of the year. The Topaz project and AVSR, funded by the Department of Energy, will account for these earnings. Since Topaz will be accounted for in Q4, First Solar's next quarter will be lower, whilst Q4 will be higher.
Trina Solar adapted its operations by completing a restructuring that regrouped its sales groups by region: the Americas, Europe, China and Asia-Pacific, Middle East and Africa. In its last quarter, Trina reported gross margins of 8.4% and a loss of $1.30 per fully diluted share. Like First Solar, Trina increased its cash balance, and now has $841 million.
Trina's inventory rose to $463 million, up $112 million.
SunPower Corporation (SPWR), another competitor, managed to reduce inventory by $65 million. More recently, the company cut its shipment forecast to 1.8 to 2 gigawatts, much to the industry's benefit.
Growing weaknesses in Europe in the final quarter of the year will continue to weigh on all stocks, but will be most pronounced for solar energy companies. Earnings for First Solar will rise independent from the macroeconomic situation. The company anticipates that revenue from larger projects will be accounted for largely in the final quarter.
Investors should expect its next reported quarter to be weak, which may lead to a further decline in its share price. This will be due mostly from revenues not being recognized. The fourth quarter will be stronger, so investors recognizing the short-term weakness will benefit from a strong final quarter.