First Solar manufactures and sells solar modules with advanced thin-film semiconductor technology, and it designs, constructs and sells photovoltaic solar power systems. The business can be divided into two segments. The principal business is the component segment which designs, manufactures and sells solar modules to convert sunlight into electricity. The other segment is the integrated systems business, through which First Solar provides complete PV solar systems. The component business has been bringing the largest percentage of revenue to the company, from nearly 97% in 2008, but reducing gradually to 78% in 2010, as the system business has grown the top line 10 times in just three years.
In terms of revenue geography, the revenue derived from Germany has been taking the largest amount out of total sales. As of fiscal year 2010, it took nearly 50% of total company’s sale, then France, the U.S., Canada and others took the same roughly 15%.
As of December 2010, the company had supply contracts for the sale of solar modules with 14 principal customers throughout the European Union. The principal customers of its components business were three customers including EDF En Development, Juwi Solar GmbH and Phoenix Solar AG. Each customer accounted for around 10-20% of total revenue. For the system segment, the revenue during 2010 resulted mainly from revenue recognition for utility scale solar power projects in North America and Europe.
The previous year revenue in system segment was mainly from the sale of two utility scale solar power systems in the fourth quarter to utilities in the U.S. and Canada. In regard to the raw materials for manufacturing, First Solar had to use around 30 types of raw materials to construct a complete solar module. One critical raw material is called cadmium telluride, and the company is exploring a variety of tellurium mineral claims in various locations and expecting to develop tellurium resources in the future.
The depressed share price, along with that of other solar companies, can be explained by the headwinds which it experienced as pointed out in my previous post of Solyndra. First is the huge inventory, estimation of 8-10 gigawatts, and the amount of excess production capacity relative to the demand currently might even higher.
The second challenge is the competition on cost with Chinese firms. First Solar got an edge on technology by using cadmium telluride rather than silicon to generate electricity and its intellectual property are protected by multiple patents. The technology edge further gives First Solar an edge on cost as well. First Solar expected to be producing modules at $0.65 by the end of 2012, and $0.51-$0.54 by the end of 2014, whereas the standard manufacturing cost at least $0.8 per watt.
In terms of previous financial performance, First Solar has been growing extremely fast over the last seven years. The business first turned profitable since 2006, whereas the revenue was at $135 million and the net income stayed at $4 million. Then 4 years passed by, as of fiscal year 2010, the revenue topped more than $2.5 billion with the net income was $664 million. And from 2007 until now, the return on equity was always staying at the double digit. Along with that, the operating cash flow has been increasing at the rapid rate as well, staying at $705 million in 2010, with $117 million in free cash flow.
Regarding the balance sheet strength, First solar can be considered to have the strongest financial health in the industry. The D/A is at 30%, and the total short and long-term debt stays only at nearly 11% of the total assets, at around $600 million, whereas the cash on hand is enough to offset the debt at $763 million.
With the multiple valuations, the P/E is at 5.2x, it is trading at 30% off its book value, only 9.4x the operating cash flow, and the strongest balance sheet of the industry, First Solar worth the look. However, the investors should consider the European consumer concentration in First Solar business models, along with the headwinds which the whole industry has to face.
Anyone who would like to hold First Solar at this price might be patient for the advance in the share price. But nobody knows, as it is still in very good shape, delivering good returns with good level of cash flows. If things occurred the same as they did in the last four years for First Solar, this would reward its investors very handsomely.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.