First Solar – A Look At The Long-Term Growth Catalysts

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Jun 11, 2015

Solar energy growth over the past few years has been phenomenal. The days of oversupply in the solar panel market is over, and many solar panel and module manufacturers have come out of the troubled waters. According to research firm Statista, the global market for solar energy is slated to touch $160 billion by 2023.

First Solar (FSLR, Financial), the nation’s largest solar panel manufacturer, doesn’t seem to be in sync with this projected growth. The company’s fiscal 2015 started on a dismal note as it missed Street’s expectations by a huge margin.

Rollercoaster revenue and earnings growth

Over the years, the revenue growth has been through a roller coaster ride, with the general trend being on the decline. During the recently reported quarter, consolidated sales declined a hefty 50.6% year-over-year to $469.2 million and missed the consensus estimate by $130.27 million. The decline was attributed to the following headwinds:

  • Labor troubles on the West Coast port that led to a delay in shipments.
  • Inordinate delays in getting statutory clearances that delayed the start of affected projects.
  • The sales of part of its Los Hills-Blackwell project to Southern Company (SO, Financial) was delayed. This has spilled over to the second-quarter fiscal 2015. So will add to second-quarter results.
  • A higher mix of module-only sales during the quarter.

Also, the company has retained projects for dropping into a YieldCo vehicle that it is forming with brethren SunPower (SPWR, Financial) as a joint venture.

In line with top-line performance, earnings have also been on a same trajectory over the years. During the recently reported quarter, adjusted loss per share came in at $0.62 compared to Street’s expectation of $0.33. In the year-ago quarter, the company had reported adjusted earnings of $1.10 per share. The dismal performance spooked the investors. To make matters worse, RBC Capital Markets LLC downgraded the company from Sector Perform to Underperform. However, it's not gloom and doom for First Solar.

Few growth drivers

First Solar’s module conversion efficiency is improving continuously. During the recently reported quarter, full fleet efficiency improved 30 basis points to 14.7%. Also, the lead line efficiency improved 140 bps year-over-year to 15.7%. This has been the largest improvement in lead-line efficiency in the history of the company. Higher efficiency will trickle down to the bottom line of the company.

8point3 Energy Partners is the name of the yieldco vehicle, a joint-venture between First Solar and SunPower. The portfolio will include 226 MW of generation from four First Solar-owned plants, and 163 MW of generation from SunPower-owned plants.

The newly formed company is projecting to pay an annual distribution of $0.8388 per share initially. Also, it is targeting its annual distribution growth rate at 12% to 15% per share over a period of three years following the IPO. The joint-venture aims to raise over $400 million through IPO. Once the IPO is completed, the yieldco will trade on the Nasdaq Global Market under the symbol “CAFD.”

First Solar’s partnership with construction machinery behemoth Caterpillar (CAT, Financial) will be another long-term tailwind. Under the agreement, First Solar will manufacture Caterpillar-branded panels along with pre-engineered turnkey packages for use in remote microgrid applications, such as small communities and mine sites, where grid power availability is a concern. This will be a good growth driver starting from the back half of fiscal 2015.

“Caterpillar expects to first market the new microgrid solution in the Asia Pacific, Africa, and Latin America regions, with the integrated PV solution, including Cat-branded solar panels, available for customers in that region in the second half of 2015.”

The burgeoning global growth is another tailwind. First Solar outstanding bookings increase by 200 MW over the comparable period in the prior year. The company’s manufacturing facility is all sold out for fiscal 2015 and the capacity at it Ohio plant is being increased by two lines. The single largest booking was with Strata Solar for 300 MW of deliveries in 2016.

Also, expansion in the international market is going to be another tailwind. The company’s transition to sustainable markets out of U.S. is gaining momentum as more than half of the mid and late stage opportunities are now in international markets.

Wrapping up

First Solar’s journey may not have been smooth but the transition troubles are a thing of the past. The YieldCo venture is all set to take off. Also, an increase in efficiencies will help in cutting costs and improve bottom-line. The company has a healthy balance sheet with cash of $1.48 billion and debt of $246.99 million.

Hence, First Solar is still a good buy for long-term despite the dismal quarterly performance.