The company posted Q4 2012 EPS of $2.04 and revenue of $1.08 billion. While EPS of $2.04 beat estimates of $1.76, revenue missed estimates by $240 million, due to the timing of revenue recognition related to the company’s project backlog. In Q4 2012, revenue grew by 62.79%, and EPS grew by 61.9% year-over-year. In this post I will offer an argument for the long-term viability of First Solar’s business in solar energy.
First Solar, Inc. (NASDAQ:FSLR): Company overview
First Solar, Inc. (NASDAQ:FSLR) is the market leader which derives its income from photovoltaic (PV) solar energy solutions. First Solar has finished several projects and is currently constructing the world’s largest PV power plant (Agua Caliente Solar Project). In 2012 the company started a transition from traditional subsidized markets to high growth markets. Most of its current income streams are directly derived from contracts awarded in traditional subsidized markets.
Solar energy is not cheap, but it is clean and safe. Most of the business being made in the sector is highly subsidized by government or municipalities. A continued or increased subsidy is essential for the industry. In 2011 global subsidies for renewable energy, including wind, wave, geothermal and solar power was $66 billion (up 10%) while subsidies for fossil fuels were $409 billion (up 36%).
A number of countries have started to phase out fossil fuel subsidies. While it may take many years to come, there is no doubt that a shift to renewable energy subsidies has started. Unfortunately for the renewable energy business, the worsened economic climate is slowing the pace of the expected shift in subsidies money. A study by the International Energy Agency (IEA) offers the following outlook:
Comparing the baseline 2050 and the BLUE Map, which is the IEA’s most optimistic view, there is a big discrepancy. Basically, the bullish case for renewable energies is that coal dependency is sharply reduced. In the same study, the IEA did a breakdown of the renewable energies and expected division in the BLUE map scenario.
Solar power is likely to have a larger share of markets which are geographically better suited to absorb sun (most of the high-growth markets). Internally the solar market is divided into SCP (solar concentrating power) and PV (photovoltaic). The IEA does not consider them competitors and rather sees them as complementary.
First Solar, Inc. (NASDAQ:FSLR)’s growth catalysts
Gross Margin to Improve: First Solar’s gross margin has historically been high at above 30%. But the company’s 2012 full-year gross margin fell to 25.32% from 35.1% in 2011. In 2012, since panel prices declined at a much faster rate than manufacturing costs, the gross margin plummeted to around 12%. The operating margin, however, came in at 14.6% for 2012, versus 13.92% for 2011, reflecting the improvements that First Solar, Inc. (NASDAQ:FSLR) has made in its operating cost structure.
Actually, such a gross margin level is not reflective of the long-term profile of First Solar’s business. Its gross margin should improve to around 20% by the end of 2014 as the firm has been investing in improving its manufacturing process and boosting conversion efficiency of its panels, which should help to reduce costs further.
Module Shipments to Recover First Solar’s international sales fell by nearly 50% to around 315 MW in 2012, primarily due to decline in sales to France. Analysts expect sales to recover to around 700 MW by the end of 2014 as the firm sells more modules to regions like India, Australia, China and Africa.
R&D Improved Efficiency: First Solar, Inc. (NASDAQ:FSLR) achieved a new record for its CdTe (Cadmium Telluride) cell efficiency at 18.7% in 2012. This was set using materials and processes used in a manufacturing environment and confirmed by the U.S. Department of Energy’s National Renewable Energy Laboratory or NREL. This breaks the company’s previous record for cell efficiency at 17.3%. This is a tremendous achievement on the part of the company’s technology team and validates the management’s continued investment on R&D.
Chinese Footprint to Expand: In China, First Solar completed shipments to supply a project owned by Zhenfa with 2 megawatt of First Solar’s modules in Q1. This represents the company’s first commercial demonstration project in China providing it the opportunity to showcase its technology and encourage the adoption in China, another key sustainable market. However, sociopolitical considerations are forcing the Chinese government into a difficult situation, which may negatively impact First Solar’s Chinese operations in the short run.
Competition: First Solar vs. peers
First Solar’s financial position within the solar sector is at the top. The company’s Q4 2012 results confirmed this, as compared to the results of sector peers that have reported their Q4 2012 earnings (see the table below). SunPower Corporation (NASDAQ:SPWR) and Trina Solar Limited (ADR) (NYSE:TSL) have already posted Q4 results, and the rest of the sector is set to report throughout this month.