First Solar: Undervalued Prior To 2019 Financial Guidance?

Summary

• FSLR announced that it will present its 2019 Financial Forecast on December 11.
• FSLR has bounced from a 52 week low of $36.51 in late October but is struggling to breakthrough a descending 50 day Moving Average in the run up to December11th.
• Solar module pricing has declined during 2018 due to the impact of US Section 201 Tariffs and a policy change in China and the perception of weakening worldwide demand growth.
• Stocks in the sector have been hammered. FSLR, however, has important differentiating product and financial characteristics, particularly its back log of sales for 2019 and 2020 and balance sheet cash.
• 2019 projections are likely to show the completion of its Series 6 rollout and very solid cash flow generation sufficient to cover the Series 6 buildout.

First Solar, Inc. (NASDAQ:FSLR) announced it will present its 2019 Financial Forecasts on December 11th, 2018. FSLR hit a 52 week low of $36.51 in late October and has traded between $44 and $45 recently. It is struggling, however, to break through a descending 50 Day Moving Average trend line that will continue to decline through December 11th. The 2019 Financial Forecast release on December 11th could be a timely catalyst to break this downward trend and at least put a bottom underneath the stock (barring a general market selloff due to the impending S&P death cross).

Solar stocks in general have had a poor 2H 2018 with some of the solar manufacturers, such as Jinko Solar (JKS), trading down 30% to 50% prior to a recent rally driven by solid JKS Q3 results on November 26th. The selloff in solar manufacturer stock prices was driven by a steep drop in module prices due to the perception that US Section 201 tariffs on the importation of crystalline silicon photovoltaic ("CSPV") cells and modules would reduce demand in the U.S. during 2018 and 2019 (and perhaps beyond) and to the major change in government policy by China in a May 31st announcement that was anticipated to push the global growth rate (ex the U.S.) in solar installations downwards.

FSLR data by YCharts

The downturn in FSLR's 50 day moving average began with the market's reaction to its Q3 earnings and the full year 2019 forecast released on October 25th (here is the 10Q). At the December 11th release of 2019 Financial Forecasts, 32 trading days will have passed since the Q3 earnings price decline. The descending 50 dma will be within 10 days of flattening and any positive news could act as a catalyst to put in a bottom and potentially serve as a base for a rebound.

FSLR Q3 Earnings and FY 2018 Projections Did Not Help

FSLR released earnings on October 25th that disappointed investors and resulted in the stock trading down to the mid $30s. What seemed to spook investors the most was the cash balances at Q3 (down about $405 million from Q2) and a reduction in forecasted Net Cash Balance for the full year at Q4 2018 of $200 million. The 7% to 8% reduction in full-year shipments also played into the narrative of slowing demand and production issues with the Series 6. The table with the full-year 2018 projections is included below.

The reduction in Net Cash Balance expectations was important because it is the prime differentiating factor between FSLR and other solar manufacturing companies. The debt on FSLR's balance sheet is almost entirely nonrecourse project finance debt on projects under development. Although even the company presents its Cash Balance on a net of debt basis in the table above, a truer representation of FSLR's cash resources would exclude the nonrecourse project debt. Obviously, FSLR, for business reasons, would be unlikely to let a project under construction fail, but the netting of the project debt obscures a bit the true financial muscle of the entity. On a gross basis, FSLR has approximately $2.7 billion of Unrestricted Cash and Marketable Securities. With 104.8 million shares outstanding at October 19th, cash per share was $25.76 per share. There is room for debate about how much of this cash is excess to needs, since it provides FSLR a competitive advantage within the US market on utility scale and C&I projects (as merely a module supplier or as developer and EPC). It would be fair, however, to adjust any PE multiple calculations by a significant portion of this cash per share amount.

Q3 Results and Full Year Forecasts in Context

The reductions in the 2018 forecast and FSLR's Q3 financial results were a disappointment, but they need to be put in context. FSLR is transitioning from Series 4 to Series 6 and the rollout of a new product can result in a bit of turbulence in operating performance and financial results. It is not uncommon to encounter production snafus while bringing multiple new facilities and production lines online in parallel. FSLR made steady progress between Q2 and Q3 2018 on the manufacturing side improving throughput, watts per module, and TOP Bin Watts per Module (see page 6 of the Q3 Earnings presentation).

On December 11th, 6 weeks will have passed since the Q3 earnings conference call, about half the time between normal quarterly earnings and operating updates during the rest of the year. If FSLR can show modest improvements in its efforts to improve Series 6 manufacturing, it will address a big part of the concern that has negatively impacted the stock price.

FSLR had booked all of its remaining production capacity for Series 4 prior to decommissioning those lines as noted in the Q3 conference call. For the Series 6, FSLR had booked all of its projected production for 2019 and most of the projected production for 2020 based on management comments on the conference call. These contracts are most likely at fixed prices or at most contain minor pricing adjustments that could push revenue per panel down slightly from the original agreement. The contracts, however, will also contain performance milestones and certification requirements that benefit the buyer, i.e. sales prices on signed contracts are locked in unless FSLR does not meet its contractual requirements. Steady progress on achieving manufacturing goals will ameliorate any concerns over future production volumes, pricing, and potential contract cancellations.

As discussed during the Q3 conference call, there may also be some allocation of Series 4 sales to Series 6 modules. This may depend on near term certification of the Series 6, but it would be an opportunity for FSLR to capture increased margins on these particular contracts.

The glut of manufacturing capacity in China caused by the policy change announced in May 31st has driven down prices as manufacturers have scrambled to maintain sales and cost absorption at the expense of profitability. JKS recently posted good margins and revenue on a per watt basis but the impact of lower recent contracting prices will only begin to be felt as older contracts roll off. FSLR will likely not face that issue until late 2020 for some small to modest volumes of Series 6 and early 2021 for greater volumes of Series 6. Because its thin film modules produced outside and then imported into the US do not fall under the Section 201 tariffs (they are not CSPV cells or modules), the pricing pressure may be a bit muted in comparison to JKS and similar CPSV producers.

Whither Cash?

During the Q3 conference call, management maintained its cumulative spend on Series 6 at $1.9 billion and stated that $1 billion of that cumulative spend had been occurred as of Q3. The full year forecast above estimates CapEx between $800 to $900, most of which pertains to Series 6. CapEx was $610 at Q3 per the 10Q. This implies that 2019 CapEx for Series 6 will be between $600 and $700 million, below the current forecast for 2018.

The CapEx spend on Series 6 will dramatically increase FSLR's production capacity to 6.6 GWs per year, average capacity for the year will of course be lower. This expansion in production capacity will be phased in over the course of 2019. As discussed in the conference call, the construction on the second production facility in Vietnam is complete and 80% of the tools have delivered. Commercial production is expected to commence Q1 2019, moved up by one quarter. Construction of the second plant in Ohio was underway at the date of the conference call. In combination with the slowdown in capital expenditures during 2019, Series 6 production from the Ohio, Malaysian, and Vietnam facilities should steadily increase during the course of 2019 and, in combination with Series 4 production, easily exceed 2018 total production. This should set the stage for a rebound in revenue and cash flows for the full year 2019, even if there is a decline in price per watt on the modules.

Are We at the Expectations Bottom for Solar Growth?

The May 31st announcement by China certainly rocked the solar manufacturers, but the decline in the price of solar modules will inevitably have a positive impact on per annum solar installation growth. The decreasing cost of solar power will drive demand higher as solar's levelized cost of energy approaches or declines below non-renewable alternatives in an increasing number of geographies, regulatory jurisdictions, or polities both domestically and internationally. Solar's penetration will also be aided by the steady decline in storage technologies that will firm up the availability of solar energy on an operating basis. These advances are likely to occur faster and be implemented faster than the market currently expects.

There is also a political and geopolitical aspect to the demand for renewables, including solar. Pollution is a critical challenge to the legitimacy of the government in China. There is a fundamental tradeoff in the social compact: economic advancement and improvement in the health and welfare of the people in return for acceptance of an autocratic government. The government in China may meander from aggressively promoting renewables from time to time, but it will always be forced back to the high growth path as a strategy to avoid discontentment and potential social unrest.

In Europe, the growth in renewables is a counterweight to increasing regional aggression from Russia. More renewables, less demand for natural gas (and coal and nuclear). Less demand for natural gas from Russia, more room to maintain economic security and support western European democratic ideals. Don't underestimate this impetus, along with the need to address the issue of global warming, as a driver for demand.

Here is an article about demand in the US. It is anecdotal but it points to a bottoming out of growth expectations.

Conclusions

The December 11th release of the 2019 Financial Forecast is likely to put a floor underneath the FSLR stock price and set the stage for a stock price rebound. There are risks: any hiccup in progress on Series 6 production would be badly received and any general selloff in the S&P 500 as the death cross occurs could drag FSLR down with it.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.