Wait For Regulatory Recentering On First Solar
Summary
- This $8.8 billion market cap photovoltaic manufacturing company may interest investors once the changes in the US and California energy investment policy are better known. The company does not pay a dividend.
- Uncertainty about the latest spending bill, tax credit extensions, the federal goal of cutting solar costs, and the potential California scale-back of rooftop solar have dampened enthusiasm for the sector.
- Investors may want to see how these regulatory uncertainties resolve, along with changes in First Solar's results after the divestment of two operating segments.
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Just as Covid was heating up over a year ago, First Solar (NASDAQ:FSLR) looked promising as a rare US-based photovoltaic manufacturer. While it made a profit in 2020 and is well-positioned to benefit from ESG investment, its price run-up, a 4Q earnings miss, general regulatory issues, and the recent sale of two parts of its business suggest investors should hold off until results are re-centered and should not count on ESG momentum to buoy the stock.
In fact, all solar company stock prices are off from recent highs due to uncertainty about the current $2.3 trillion spending bill including the likelihood of tax credit extensions, the Biden goal of cutting solar costs by 60% by 2035, and proposed scale-back of rooftop solar in California. First Solar's competition includes very low-priced Chinese solar manufacturers; thus, the US administration's goal of cost-cutting could put significant pressure on much of First Solar's pricing because much of First Solar's sales are in the US.
First Solar is not recommended to dividend investors.
Because regulatory requirements are central to solar energy equipment demand, other investors will want to see settlement of these regulatory uncertainties. Similarly, another quarter or two of financial results after the company's divestment of two operating segments will provide useful perspective.
Recent Asset Sales
At the end of March 2021 First Solar sold its North American Operations and Maintenance business to NovaSource Power Services. About 270 First Solar associates joined NovaSource, an Austin, Texas-based portfolio (private) company of the Clairvest Group.
According to a First Solar official, the O&M gross margins had shrunk from 30% in 2017 to 10% recently; and power-purchase agreement prices for utility-scaled solar projects had fallen.
Then a few days ago, at the beginning of April 2021, First Solar sold its utility-scale solar project platform of about 10 gigawatts to Leeward Renewable Energy LLC, a Dallas, Texas-based portfolio (private) company of Canadian investor OMERS Infrastructure. More than 50 First Solar employees joined Leeward.
While no transaction price was given for either of these, in its first-quarter guidance, the company noted an expected pre-tax 2021 gain of $140 million for their sales.
U.S. Investment Tax Credit
In the U.S., the Investment Tax Credit Section 48 incentive is 26% for equipment on which construction has begun any time through 2022, declining to 22% for 2023 and to 10% for 2024 and thereafter for commercial and utility-scale solar investment, but to 0% for residential solar starting in 2024.
The current federal proposal would extend this tax credit and phase-down for several more years.
2020 Results
In 2020 First Solar's sales were $2.7 billion and net income was $398 million, or $3.73/share. Capital expenditures were $417 million. Free cash flow was negative at -$380 million.
The company produced 6.1 gigawatts of modules, including 5.9 gigawatts of its new Series 6. First Solar booked and shipped 5.5 gigawatts.
Guidance
For 2021, sales are expected to be $2.8-$3.0 billion with operating income at $545-$640 million and earnings per share (EPS) at $4.05-$4.75/share. Capital expenditures are projected at $425-$475 million and shipments at 7.8-8.0 gigawatts.
Using the midpoint of the company's EPS guidance gives a forward price/earnings ratio of 18.7.
First Solar expects to grow its nameplate capacity from 6.3 gigawatts at the end of 2020 to 9.4 gigawatts at the end of 2022, a 50% increase.
Macro Environment - U.S. and Global
Many regulators and state governments in the U.S. and Europe are pressing for carbon reduction in overall energy use, thus creating a large demand for clean (nuclear, solar, wind) energy. Installation and use of utility-scaled photovoltaic solar systems is one avenue to meeting these goals.
The Energy Information Administration (EIA) projected significant growth in solar energy generation of electricity in its most recent forecast.
Sector Competitors
First Solar was founded over 24 years ago and is a Tempe, Arizona-headquartered producer of photovoltaic solar products for electricity generation. It is the only U.S.-headquartered company among the ten largest global photovoltaic module manufacturers. Competitors in the general sector include Hanwha Q CELLS (HQCL), Canadian Solar (CSIQ), SunPower (SPWR), SolarEdge (SEDG), Enphase (ENPH), JinkoSolar (JKS), and Vivint Solar, a division of Sunrun (RUN).
The company makes cadmium-telluride solar cells which give the cells a superior performance advantage, according to the company, to other companies' technology of crystalline silicon.
First Solar identifies several factors in reducing its cost per watt, the measure of efficiency. These include increasing watts per module from 445 to 500 as well as increasing capacity utilization and yield.
Customers
First Solar manufacturing facilities are in Ohio, Malaysia, and Vietnam. These locations, its Arizona headquarters, and its ten offices allow the company to serve U.S. and international customers.
The company noted a total of 19.7 gigawatts of booking opportunities globally, with about three-fourths in North America. About 80% of what the company terms "mid to late-stage" booking opportunities are in North America, with most of the rest in Europe or India.
During 2020 Longroad Energy, NextEra Energy (NEE), and Softbank each accounted for more than 10% of First Solar's modules business net sales.
Credit: firstsolar.com
Cross-Fuel Competition in the Utility Market
Solar's appeal is obvious in the desert southwest of U.S. Solar technology is typically divided into thermal (rooftop collectors) and photovoltaic solar (electricity production) from companies like First Solar. Benefits include the simplicity of capturing sunlight and the lack of emissions during energy production.
Challenges of using photovoltaic solar to make electricity are the need for new infrastructure (collectors, transmission lines), the diffuseness of the energy source requiring substantial acreage and a large base of equipment to be installed and maintained, the costs of battery storage, and reliable back-up sources due to the intermittency issue.
Moreover, while utilities are required to diversify their fuel sources, they are also tasked with dispatching to customers from various sources based on cost, availability, and scale. The ways in which generation-including solar generation-can be insufficient to meet demand, requiring blackouts, were illustrated on large, expensive scales during the 2020 California wildfire season and during the 2021 Texas Arctic Freeze.
However, regulators and state governments (particularly in the Northeast U.S. and on the West Coast) are mandating increased use of renewable fuels like the photovoltaic solar provided by First Solar to generate electricity. Timetables range from "right now" to 2050.
Governance
On April 1, 2021, Institutional Shareholder Services ranked First Solar's overall governance as 4, with sub-scores of audit (2), board (6), shareholder rights (1), and compensation (6). On the ISS scale, 1 represents lower governance risk and 10 represents higher governance risk.
As of March 15, 2021, shorted shares were 9.6% of floated shares. Insiders own 12% of the equity. The largest inside holder is Lukas Walton, who had a 4.9% position as of December 21, 2020.
The company's beta is 1.38: its stock moves directionally with the overall market but more sharply.
Stock and Financial Highlights
First Solar's April 5, 2021 closing price was $83.12/share, 74% of its 52-week high of $112.50/share. Its market capitalization is $8.8 billion, larger than its enterprise value of $8.0 billion.
In 2020, the company's EPS was $3.73, for a current price-earnings ratio of 22.3. As noted above, using the midpoint of company guidance of $4.45/share for 2021 gives a forward price-earnings ratio of 18.7.
Return on assets was 3.0% and return on equity was 7.5%.
As of December 31, 2020, First Solar had liabilities of $1.6 billion, including long-term debt of $280 million, and assets of $7.1 billion, giving a very good liability-to-asset ratio of 22%.
The company does not pay a dividend.
First Solar's average analyst rating from 17 analysts is 2.3, or "buy" leaning toward "hold."
Notes on Valuation and Beta
The company's market value per share is 60% above its book value of $52.09/share, indicating positive market sentiment.
The company's ratio of enterprise value to EBITDA is a high 13.6, more than the preferred ratio of 10 or less, suggesting the company is not bargain-priced.
Positive and Negative Risks
As noted above, regulation and government policy at the federal and state (especially California) level is both a positive and a negative risk. The drive for renewables - particularly with the US federal administration's plans - bodes well for companies that provide solar equipment, like First Solar. However, federal or state competitive sourcing of solar components internationally could drive down revenues and profitability.
In the private sector, while encouraged by many state governments, utility-scale renewable fuel projects nonetheless compete with one another and-at some level-with large-scale traditional fuels such as natural gas, coal, and particularly nuclear.
Other risks include tariffs affecting sales abroad, intellectual property concerns, and divergence of the interests of the largest inside stockholder from those of other stockholders.
Projects and project revenues can be "lumpy" with large chunks of revenue and income realized at irregular intervals.
Recommendation
First Solar is not recommended to dividend investors as it does not pay a dividend. ESG, utility supplier, and some energy investors will want to wait for the company's financial results to resettle a) after its O&M and project platform divestments, b) to determine if the California incentives for rooftop solar are revised, c) as the federal government implements (or doesn't) a tax credit extension for solar investment or provides other incentives in its spending bills, and d) to see how the federal government meets its stated goal of reducing U.S. solar costs by 60%, such as driving down prices by sourcing from very low-cost Chinese manufacturers.
First Solar is nonetheless to be commended for successfully navigating the challenging economic circumstances of 2020. It continues to be one of the strongest companies in the sector - in particular, the encouragement offered at the U.S. Federal and state levels for solar installation may lead to increased demand for photovoltaic modules like those First Solar provides.
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Comments (23)
There is no investor premium priced in, what balance sheet are you looking at? Tangible assets + cash are near 50 dollars a share. Their implied production in 2023 is probably at 13-15 gigawatts depending on when they announce Indian manufacturing. At 7-8 cents a watt in gross margin that is 6 dollars a share in eps.
Thanks for the FSLR article. A few points - FSLR is utility-scale solar - not rooftop: You stated:"California scale-back of rooftop solar have dampened enthusiasm for the sector."FSLR does not do rooftop. This would affect CSIQ, JKS, ENPH, and SEDG. Also, you list ENPH and SEDG as competitors of FSLR? They are not. both are in residential inverter space - not the solar panel space for Utilities.You also state:
"Solar's appeal is obvious in the desert southwest of U.S. Solar technology is typically divided into thermal (rooftop collectors) and photovoltaic solar (electricity production) from companies like First Solar. "?? this does not make sense - do you really understand the Solar industry? So rooftop solar is "thermal" ?? In today's market all the solar modules being deployed at PV - photovoltaic -, not thermal power - CSP:
en.wikipedia.org/...FSLR is unique in that is thin firm solar, whereas the other tier 1 solar module players are silicon-based solar PV or Si-solar. FSLR used a compound - CdTe and has had some pushback over the years as the Cadmium is toxic - but the compound is not...Another false statement:"Challenges of using photovoltaic solar to make electricity are the need for new infrastructure (collectors, transmission lines"One of the key advantages to Solar PV is that it is distributed - can be sited close to the electrical loads(demand) - so you need far less T&D infrastructure. The utility arrays can be near major highways and near large cities like las vegas:www.latimes.com/...I encourage you to do some more DD on the solar industry in general.ESP
FSLR just sold its O&M group, which means, perhaps only that it no longer has the function, but O&M ties in with utility service, so it is interesting FSLR would part with it.
Re distribution-part of admin $2.3 trillion is for transmission--and utility-scale solar arrays are quite frequently sited far from population centers. The vast land requirements for utility-scale solar (and wind) means they are not found within city limits of, say, NYC, SF, or Washington DC.
"FSLR just sold its O&M group, which means, perhaps only that it no longer has the function, but O&M ties in with utility service, so it is interesting FSLR would part with it."I have been against FSLR selling these Biz units - I know their reasons - that these do not have the same high margins as selling the series 6 module - but I like diversification in the revenues and earnings streams. Now they are "all in" with just making and selling the 6."The vast land requirements for utility-scale solar (and wind) means they are not found within city limits of, say, NYC, SF, or Washington DC."Solar and wind can and do use "brownfield" Along interstates, C&I rooftop, water canals, parking lots, and can be DG - meaning 500kw hear, 1 MW there,etc..I do not wish to sound rude - you do not seem to be very knowledgeable about renewables?I like your oil and gas articles!ESP
To more fully understand how solar + wind can provide a high % of Powergen and actually be a healthier grid read my article below:seekingalpha.com/...Hope this helps;ESP
Plus any proposed dent in the key CA state market also substantially affects solar suppliers in the US.
I'm not sure why you would raise those questions without bring up, you know, any of the actual numbers.Ultimately your article boils down to, "ooo spooky 60% cost decline." Which is incredibly lazy. The reality at the moment is that module costs have reached their nadir and there is an ongoing bifurcation between the tier 1 suppliers and tier 2/3, there will be increasing leverage around different module characteristics. For instance First Solar modules are more insurable due to being inherently immune to cell cracking.When it comes to that announcement it's tied to 128 million dollars, it can happen if we get good heterojunction technology that pushes efficiencies above 30%, but outside of that 60% is not going to be possible. What's more important is the 10 year tax credit proposal with that tax credits being able to be exchanged for money.Regardless I'm not going to write an article in the comments. I suggest you stay away from the stock and the sector in general.