First Solar: The Future Looks Bright

Summary

• 2018/19 brings investment and operational expansion.
• A better entry position is on the horizon. Be patient.
• Backlog creates an enticing global growth opportunity.

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I'm confident in the future outlook of First Solar (NASDAQ:FSLR) and the growth initiatives proposed by management. The new factory in Perrysburg, Ohio will bring economies of scale to FSLR's largest total addressable market (TAM). We should expect some volatility in the stock as management navigates the Series 6 investment phase. FSLR is well positioned to capitalize on global growth in the solar industry.

Operational Expansion

FSLR set the tone of the earnings call by announcing plans to build a new Series 6 manufacturing facility in Perrysburg, OH. The factory will be completed in late 2019 and fully ramped by the end of 2020. It will provide an additional 1.2 gigawatts (GW) of Series 6 nameplate capacity. FSLR currently has 600 megawatts (MW) of Series 6 capacity located in Perrysburg. The new factory effectively triples the capacity in Perrysburg to 1.8 GW, making FSLR the largest solar module manufacturer in the U.S.

Management notes three benefits to building the new facility in the United States:

1. Tax reform and favorable local/national business environment,
2. Series 6 low cost of labor per watt mitigates the benefits of outsourcing production, and
3. Leverage the experience and R&D of the nearby factory.

I would like to focus on the third benefit - leveraging the experience and R&D at the nearby factory. As an Ohio native, I'm familiar with Perrysburg, and it's not a giant city (approx. 20k people). Building a second factory in the same town will be extremely beneficial and provide economies of scale. FSLR can easily move managers and other highly skilled employees when production begins. The experience of nearby factory employees will contribute to increasing the speed at which production is ramped. Management has previously cited some issues in the manufacturing process abroad, and I believe having experienced personnel nearby to coach new employees through the initial struggles will be a cost-saver. This will reduce the expenses of production ramp and create further savings from economies of scale by centralizing the U.S. development of Series 6 solar panels to Perrysburg.

Management also informed investors that the newly proposed Perrysburg factory could further create economies of scale in the U.S. market. As per CEO Mark Widmar:

The site selected could accommodate a second factory of equal size and we will continue to monitor market conditions and our relative competitive position as we evaluate the potential for adding additional capacity.

This is another important statement about the location of the new Perrysburg facility. FSLR can double the size of the proposed Perrysburg facility based on market demand. No dates or plans for the expansion were listed, but it has the potential to increase Perrysburg's nameplate capacity another 1.2 GW, if the factory supports the same output level. This would bring the total nameplate capacity of FSLR-Perrysburg to 3.0 GW and further increase economies of scale by consolidating U.S. production.

Wait for a Better Entry Position

I expect volatility in FSLR's stock price this year. 2018 is characterized as an investment year, meaning we should expect capital outlays to smooth out manufacturing problems and increase production. Guidance has been revised to account for minor issues with the manufacturing ramp. I think the revision will provide investors with a quality buying opportunity if management misses expectations. Shown below is management's revised guidance for 2018.

Revised guidance for 2018 calls for decreased net cash balance (down $1 billion) and operating cash flow (down $100 million). They are accompanied by an increase in capital expenditures (up $150 million). The revised guidance can be attributed to issues management is experiencing with the manufacturing ramp.

Again, as per the CEO:

In terms of manufacturing readiness, which captures elements such as building preparation, tool installation, staffing and other activities, we continue to make excellent progress and we scored our readiness as green across all four of our factories.

Management is confident with the manufacturing readiness in Ohio, Malaysia, and both Vietnam factories. The issues I'm monitoring exist in the manufacturing ramp. As per Widmar:

While we are pleased with the manufacturing readiness progress, we are working through a number of issues related to our manufacturing ramp. For this reason, we have scored the three associated metrics of wattage, throughput and product readiness as yellow. The first thing to note is that the issues we're having are normal occurrences for this phase of factory ramp and we are proactively addressing them.

Although the manufacturing ramp issues are common, they represent another potential for volatility. I will continue to monitor the metrics marked as yellow, especially the third - product readiness. The product readiness deals with required testing of the Series 6. Management comments that the certification of the Series 6 might be delayed a few weeks past their initial projections. This could negatively impact the production schedule. As per the CEO:

While the [Series 6] is meeting the design intent on all fronts, there is a score of yellow based on the completion of timing. We anticipate the certification may slip a few weeks past our original target. However, we remain confident that it will not be a question of whether we obtain these certifications, but rather a question of time before it's completed.

So, management is already anticipating a setback from product readiness. We should expect some delays in shipments of the Series 6. The other metrics of "throughput" and "wattage" are on my watch list for potential issues, but I do not think these pose as significant a threat as product readiness.

The potential for stock fluctuations based on manufacturing ramp still exist. I've highlighted the key areas that could have an impact on near-term future output and share price. A slight miss on production targets could create an excellent opportunity for buyers.

Growth Prospects

It's no secret that traditional fossil fuel stocks are drifting out of favor with investors. Hedge funds, individual investors, and the World Bank have shifted the future of global energy. FSLR is in a prime position to capitalize on the shifting trend from fossil fuels to solar power.

FSLR indicates North America as the most significant market for future growth. Coupled with the additional economies of scale from the new Perrysburg facility, FSLR is well positioned to capture the U.S. and global markets. The recent rollout of the Series 6 will aid FSLR in capturing market share. Again, as per the CEO:

The most notable achievement to highlight is the start of [Series 6] production at our Ohio factory at the beginning of this month.

This is an important statement because it puts FSLR one step closer to meeting their goal of capturing the North American market. The amount of work and preparation that was needed to design and validate the process is essential for the future growth of the Series 6. It will allow management to pursue the North American market with a more efficient asset, the Series 6. Shown below are markets for solar expansion.

I agree with management's decision to indicate North America as the most promising market in the "mid- to late stage." The majority of growth in North America will come from the commercial sector, mainly utilities, developers, and corporate clients. That's apparent in FSLR's bookings and backlog. The following table shows commercial projects booked in Q1 of 2018 alone.

While FSLR booked nearly 1.0 GW in the U.S. this quarter, bookings also increased globally. Europe increased bookings by 350 MW. FSLR mentioned the Asia-Pacific (APAC) region as another growth driver. Australia and Japan are also showing signs of positive growth, so the APAC region is beginning to heat up as well. The following chart, provided by management, indicates the total backlog of bookings as of April 26, 2018.

At the start of 2018, FSLR had total bookings of 7.8 GW. Management grew the total backlog to 10.6 GW, aided by quarterly bookings of 1.4 GW in Q1. The start of Q2 is already positive. Between April 1st - 26th, an additional 1.9 GW were added to the backlog. Going forward, I expect bookings to increase as management capitalizes on the indicated target markets, mainly the U.S., Asia-Pacific, and to a lesser extent, Europe.

Conclusion

FSLR's decision to build a new factory in Perrysburg is based on increases in demand and a growing backlog. The option to expand the Perrysburg facility will provide more cost savings when centralizing North American production. The growing backlog and economies of scale provide an enticing opportunity for future growth. I think a better entry position is on the way as management continues to navigate through their investment period. Building factories and perfecting the manufacturing process could cause near-term fluctuations in the stock price, and I will use these opportunities to purchase more shares.

Analyst’s Disclosure: I am/we are long FSLR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.