At an April 9 meeting with analysts in midtown Manhattan,
First Solar management raised revenue and earnings guidance for
2013. The Tempe, Ariz.-based solar project developer and panel
producer also outlined an aggressive road map to future cost and
efficiency improvements. Management expressed optimism that 2015
earnings would rebound after a dip next year.
The market response was swift and positive.First Solar (
) shares, which had traded above 300 in May 2008 but began the
day at 27, soared more than 45% before the market closed.
Was the worst finally over for First Solar? Or was the bounce,
fueled by an accounting change and short-covering, an overly
optimistic reaction to management announcements?
Before tackling these questions, it's worth reviewing a bit of
First Solar has been unique in a solar industry where strong
global demand has rarely translated into sustained corporate
profit. Unlike most solar panel producers, whose devices are
based on polysilicon, First Solar modules use a thin-film layer
of cadmium telluride. As polysilicon prices soared several years
ago, First Solar leveraged its low-cost panels into a thriving
and largely profitable operation developing vast solar power
projects, chiefly in the western U.S., for utilities and
independent power producers.
But First Solar has recently felt the chill from highly
subsidized Chinese solar panel producers. With ample access to
local and state government loans -- and sometimes even free land
-- Chinese producers flooded the market. And with so many
subsidized producers offering product, industry overcapacity soon
took the air out of prices. Tumbling polysilicon prices also
helped slash panel prices and erode Fist Solar's cost advantage.
Solar panels sold at $3.50 per watt in 2005, but just 75 cents
per watt last year. And prices are still headed south.
First Solar had lost its cost advantage to the Chinese. Now,
says Pacific Crest Securities analyst Ben Schuman, First Solar
costs are "slightly higher" than those of "the best" Chinese
Meanwhile, the domestic market for the vast solar engineering
projects at which First Solar has excelled, appears to be
slowing. So while First Solar still has a flush project pipeline,
much of the resulting revenue will be booked this year and next.
Just 20% of 2015 revenue is already in the pipeline, Schuman
But this year and next, First Solar has locked in enviable
cash flow. Morningstar analyst Stephen Simko estimates that First
Solar will generate almost $1.5 billion in free cash flow in
The plan is to put that cash to work through investments in
technology that will restore First Solar's cost advantage. The
company is budgeting more than $900 million in capital
expenditures and expresses confidence in its ability to slash
First Solar's outlook now offers encouragement to both
optimists and skeptics.
"I'm cautiously optimistic," said Robert W. Baird analyst Ben
Kallo. "I'm leaning more to optimism, but it's not without
Kallo is inclined to give First Solar the benefit of the doubt
on its aggressive cost-cutting road map because "they have a good
record in hitting targets." And First Solar's strong balance
sheet, with nearly $1 billion in cash, should distinguish it from
red-ink rivals. "One of the things that will keep First Solar at
the forefront is that many of their competitors have solvency
issues," he noted.
Even more bullish on First Solar is Lazard Capital Markets
analyst Sanjay Shrestha. "They will be one of the long-term
winners in the sector," he predicted.
He is especially encouraged by management forecasts that
revenue in 2015 will rebound after a drop next year. First Solar
forecasts 2013 revenue of $4 to $4.50, followed by $2.50 to $4
next year and $4 to $6 in 2015.
Last year, First Solar reported non-GAAP earnings of $4.90.
But that did not count massive restructuring charges of $490
million that put GAAP earnings in the red. Shrestha believes the
bulk of restructuring charges are largely in the rearview mirror.
"Most of that is behind the company," he said.
Looking beyond this year and next, some analysts wonder if
First Solar can replenish its pipeline, which will suffer as the
U.S. market for utility-scale projects matures. But Shrestha
thinks First Solar's plans to address new markets can succeed.
"The industry needs to go to where there is growing demand for
electricity and electricity prices are high and there is high
solar radiation. He cites India, Chile and South Africa as three
But Pacific Crest's Schuman warns that projects within the new
marketing focus outside North America will in general be smaller.
And First Solar will have plenty of competition. "First Solar is
not the only company that has recognized this opportunity,"
Schuman said. "In my view, it will be very difficult for the
company to deliver revenue in 2015 and 2016 at the same level as
Some analysts wonder if investors realized that First Solar's
sharply hiked 2013 revenue guidance was the result of an
accounting change on a massive project in Riverside County,
Calif. First Solar management announced it would book roughly
one-third of revenue from the $1.8 billion Desert Sunlight
project this year instead of next.
"The EPS beat was entirely driven by a change in revenue
recognition policy for Desert Sunlight," wrote Credit Suisse
analyst Satya Kumar in an April 10 note.
In late March, First Solar short interest represented 3.8
times daily trading volume. Though not exceptionally high, that
was enough, some believe, to help fuel the 45% one-day rally.
"The big move was short covering," said Kallo.
Bullish analyst Shrestha notes that good news in an
environment where "short interest was so high" and general
sentiment on the solar sector "so bad" was a recipe for a sharp
But he also expresses confidence that First Solar will safely
emerge from the solar price wars. "First Solar is one of the
candidates to be a long-term winner," he concluded.