Is The Future Getting Brighter For Solar Stocks?

| About: First Solar, (FSLR)
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First Solar (NASDAQ:FSLR) shares soared more than 45% last Tuesday, hitting a new 52 week high and triggering circuit breakers on the way up. The company issued bullish earnings guidance for the year at its Analyst Day of $4.00 to $4.50 per share, with annual revenues between $3.8 and $4 billion, which was significantly higher than the street consensus. The stock is a heavily shorted name, so the good news caused a massive short squeeze.

More Highlights from First Solar 2013 Analyst Day

  • Announced early (1/3) revenue recognition of Desert Sunlight power plant project
  • Gross margin guidance - 20-22%
  • Operating cash flow guidance - $0.8B - $1.0B
  • Capex guidance - $350m-$400m
  • Company forecasts manufacturing cost of $0.63-$0.66 per watt in 2013, with a drop to $0.40 watt by 2017.
  • Acquiring Silicon Valley startup TetraSun for undisclosed amount and beginning commercial manufacturing of high-efficiency crystalline silicon technology mid-2014
  • Strongest balance sheet in industry and favorable bankability profile

The main reason behind First Solar's higher guidance was a pull-forward in revenue recognition for its Desert Sunlight project. This resulted in a substantial upside swing in earnings for 2013, but steals from 2014 results. As many of First Solar's big projects near completion, new bookings are essential to its future success. Currently, $3.4 billion of First Solar's $9 billion order backlog will be realized by the end of 2014. Many analysts worry that First Solar's pipeline of utility-scale solar projects will dwindle as U.S. utilities meet state mandates to source a percentage of their power from renewable sources. The company generates about two-thirds of its revenue from selling power plants to utilities.

So is First Solar's higher guidance and positive outlook just another "head fake" for long-suffering solar energy stock investors? Early in the year, solar and green energy names staged a rally, but by quarter-end they had given back their gains. Overcapacity continues to plague the industry, leading module prices to plunge and resulting in steep losses.

Growing Global Demand

There is evidence that the environment is getting brighter for solar stocks. Feed-in tariffs from Germany and Italy have subsided, but global demand for solar is building around the world in countries such as the U.S., India, China, and Japan. According to IHS, global solar installations are expected to exceed 35GW in 2013, growing at a rate of 12%.

The U.S. solar market grew 76% in 2012. It has become on the fastest growing solar markets in the world thanks to generous tax benefits and loan terms. And the declining pricing environment, has helped make solar more attractive. According to data compiled by Bloomberg, the average silicon solar panel price has declined 28% and thin-filmed product pricing has declined 19%.

China continues to pursue a large scale alternative energy strategy. This year, China has still allocated $2 billion in solar subsidies under its "Golden Sun" program. The funds will be spent on solar power projects with 5.2 gigawatts of capacity.

There is also a huge surge of demand for solar power in Japan. It is on track to become the largest solar market after China. Last July, a new feed-in tariff was approved to drive the use of solar energy in the wake of the Fukushima nuclear accident. Even though the tariff was cut 10% as of April 1, analysts do not expect the cut to have a negative impact on the country's booming solar industry.

Last summer's mass power outage in India, is spurring demand for solar power there. India's dense population and high solar insulation, makes it an ideal location for solar implementation. The country plans to install 20GW of grid power solar by 2020.

Global Solar Demand

Country/Region 2012 2013E % Change
China 3750 9000 140.0%
Germany 7634 3500 -54.2%
Italy 3227 2300 -28.7%
US 3200 4186 30.8%
Japan 2564 4500 75.5%
Australia 700 770 10.0%
India 573 1000 74.5%
UK 806 700 -13.2%
France 947 500 -47.2%
Belgium 351 361 2.8%
Canada 500 200 -60.0%
Africa 500 2000 300.0%
Slovakia 368 386 4.9%
South Korea 277 368 32.9%
Greece 265 272 2.6%
Ukraine 140 147 5.0%
Spain 50 50 0.0%
Czech Republic 100 100 0.0%
Others 2200 4850 120.5%
Global Demand 28159 35197 25.0%

Source: Credit Suisse

Capacity Rationalization

The Chinese government continues to cut solar subsidies in order to shrink overcapacity. And the recent action of eight Chinese banks forcing the main subsidiary of Suntech Power (NYSE:STP) into bankruptcy last March, is another sign that the Chinese government is becoming unwilling to further subsidize struggling solar manufacturers. It is unusual for Chinese companies to file for bankruptcy protection, and the government often steps in to avoid damaging the perceived creditworthiness of Chinese companies. The fact that the government did not step in to help Suntech sent a definite signal in the marketplace.

Another factor impacting Chinese solar companies are the billions of dollars worth of steep tariffs imposed by the U.S. on Chinese solar imports designed to prevent dumping and help safeguard the interests of domestic solar producers. Tariffs of about 24 to 36 percent being imposed on most solar panels imported from China, are scheduled to be in place for five years.

Chinese silicon-based producers such as LDK Solar (NYSE:LDK), Yingli Green Energy (NYSE:YGE), and Suntech Power are running at high debt levels, funded by Chinese banks. Unlike their U.S. counterparts, Chinese solar companies had previously received strong support from their local banks and governments, because of the need for them to generate employment, taxes, and revenues. As recently as January, LDK Solar got a 440 million yuan loan ($71 million) from the state-run Chinese Development Bank, to upgrade its Mahong Polisilicon plant.

Chinese Solar Stocks - Not a Pretty Financial Picture

Company Closing Price* 1 Yr Return Total Debt Debt to Equity Gross Margin
Yingli Green Energy 2.12 -41.6% $2.5B 368 -26.9%
Trina Solar 4.19 -37.6% $1.4B 156 -20.6%
J.A. Solar 4.48 -35.1% $896.3M 116 -25.6%
LDK Solar 1.22 -63.6% $3.1B 908 -101.6%
Sunpower 0.75 -73.3% $2.3B 282 -44.2%
*as of 4/12/13
Source: Yahoo! Finance

As Patrick Chovanec, a former professor at Tsinghua University's School of Economics and Management in Beijing, China explains: "The lending boom in China that took place over the last few years was actually fiscal spending in disguise, and now the bill is coming due." Chinese manufacturers were losing as much as $1 for every $3 in sales as they struggled to keep factories open as prices fell. This situation is obviously not sustainable over the long term.

Change in Business Strategy

First Solar had been pursuing the same strategy as its Chinese competitors to build large factories. But the company came to the realization that building more factories was a bad idea. First Solar is now pursuing a strategy of "smart growth." The company has scrapped plans to build factories in Mesa, Arizona and Vietnam and has closed its biggest manufacturing plant in Germany. First Solar management has a stated goal of pursuing projects going forward that are self-sustaining and not dependent on subsidies.

The company is also focusing on efficiency improvements. FSLR has demonstrated that it has achieved a world-record 16.1% efficiency full-area efficiency. This is a significant improvement from the 14.4% level achieved in January 2012 and is more efficient than most c-Si modules today. First Solar's renewed commitment to R&D is also evidenced by its recent acquisition of TetraSun, a solar photovoltaic (PV) startup. TetraSun has developed a break-through cell architecture capable of conversion efficiencies exceeding 21% with commercial-scale manufacturing costs comparable to conventional multicrystalline silicon solar cells. The company has also launched a new evolution of its Series 3 thin-film PV module platform.

Given these developments, First Solar has also accelerated its module conversion efficiency road map, raising its lead production line module efficiency target for 2015 from 15% to 16.2%, and targets for lead production line module efficiency of 16.2% to 16.9% in 2016 and 16.4% to 17.1% in 2017. What does all this mean for investors? First Solar will be able to provide high-efficiency solutions and still be competitive on a cost basis.


First Solar's results have given many investors cause to reevaluate the company's prospects and the prospects for the solar industry. According to Credit Suisse data, short interest in solar and led is now at a 30 month low. Still, given the troubled history for the industry, there is a healthy degree of skepticism. To quote Jefferies solar analyst Scott Reynolds, "While we remain bullish about the company's LT positioning, the guidance increase is largely a revenue pull-in from 2015 on a change in accounting, we continue to see FSLR as the best house in a bad neighborhood, however we don't believe the outlook has radically changed to prompt a move."

In the near-term, the broader solar market is still troubled, but the longer-term future of the industry may be getting a little bit brighter as companies capture growing global demand, rationalize capacity, and pursue more profitable business strategies.


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