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Can First Solar's New Focus Deliver Growth?

March 06, 2012 | About:
Photovoltaic solar manufacturing company First Solar (FSLR) put the market on edge and the share price through some gyrations when the permit process for a $1.3 billion solar farm hit a snag and then the snag was cleared. Projects like the Antelope Valley solar farm are the First Solar management plan to return the company to profit growth.

The Antelope Valley solar project will produce 230 megawatts of power when it is complete. The solar farm is being constructed and will be managed by First Solar. The project will belong to energy utility company Exelon Corporation (EXC) and the electric power the solar facility produces will be sold to northern California utility, PG&E (PCG) on a long term contract. The stock market got jittery in early February when an expected U.S. Department of Energy $650 million loan guarantee was held up due to lack of a permit from Los Angeles County to continue work on the Antelope Valley site. There was a range of speculation why the county permit had been delayed and The First Solar share price dropped by a quick 10% on February 10 on news of the loan guarantee delay, then another 15% over the next several trading days. Speculation even included the possibility First Solar would lose the contract with Exelon.

After a few days – as reported by the Wall Street Journal – Los Angeles County approved changes to the construction permit and the project new appears to be back on track. The changes involved different grading requirements on the site to prevent erosion damage. Bad news out of the way, the FLSR share price jumped by $5.00 before giving a couple of those dollars back by the close of the week on February 17.

Although First Solar is probably the best of the bunch in the solar panel manufacturing space, the whole sector has been under tremendous pressure for several years. An increase – capacity tripled in a few years – in module production capacity across the industry resulted in over-capacity and falling panel and module prices. Then some of the largest markets for solar equipment like Spain, Germany, Italy and France were forced to reduce or eliminate government support for renewable energy projects due to the government fiscal problems in Europe. For example, the annual photovoltaic installation rate in Spain – a major solar energy focused country – is now 75% below the 2008 level. The double barrels of bad news resulted in the First Solar share price declining from nearly $170 per share in early 2011 to a year-end value below $35 per share. The share price climbed to $50 by early February, before the latest bit of bad news and recovery.

The First Solar management has acknowledged the problems in their industry and their solution to an over-supply of product and falling prices is to focus the company's efforts on proposing, developing, building and managing utility sized projects such as the Antelope Valley solar farm. Antelope Valley was one of two large scale solar projects First Solar announced in September of 2011, the company's first projects under the new strategy. These large scale projects allow the company to directly employ the company's solar panel production in the construction phase, then generate revenue and then the company will receive management fees for many years – up to 25 – in the future. The other announced project – the 550 megawatt Desert Sunlight Solar Farm, also in California – will not produce income statement revenue until the project is complete in early 2015. The Antelope Valley project contract will produce revenue and net profits during the constructions phase, which is underway.

First Solar has entered a new economic reality where solar power has to compete on a cost of power basis with other sources of electricity including coal and natural gas fired power plants. There will continue to be government mandates for renewable energy, but companies are not going to enter into projects which do not make financial sense on a stand alone basis. First Solar is the best of the bunch of solar power panel manufacturers, but being the best may not be enough unless the company's new focus provides bottom line growth. This new phase for First Solar has just begun and investors can watch the progress of the first two plants before committing to the purchase of any FSLR shares.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

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