First Solar Looks Fairly Valued At $27
First Solar ( FSLR ) recently released its Q4 2012 results . We have updated our model and price estimate for the firm to incorporate the results and some of the recent trends in the firm's business. Among the changes, we expect lower sales prices per watt, better gross margins for modules and higher demand for modules from the rest of the world. Offsetting some of these favorable changes, we expect German demand to decline and for growth in PV systems to slow as it works through its backlog.
Our new price estimate of $27 is roughly in line with the current market price. Here are some of the key changes to our model and the rationale behind them.
1) Lower Selling Price Per Watt : First Solar's Cd-Te thin film panels compete with polycrystalline panels which have better efficiencies. (See Also: A Comparison Of Solar Technologies And What They Mean For Companies ) Recently, low polysilcion raw material prices and oversupply have caused the price of polycrystalline panels to fall significantly. This in turn has had an adverse effect on First Solar as its average price per watt fell from around $1.04 in 2011 to around $0.63 in 2012. Going forward, we expect the selling price per watt to decline, albeit at a slower rate, to around $0.56 per watt by the end of the Trefis forecast period as the firm improves conversion efficiency and makes its panels more competitive with silicon based panels.
2) Gross Margins For Modules Should Improve : First Solar's module gross margins have historically been high at above 40%. However in 2012, since panel prices declined at a much faster rate than manufacturing costs, gross margins plummeted to around 12%. We believe that gross margins can improve to around 20% by the end of the Trefis forecast period as the firm has been investing in improving its manufacturing process and boosting conversion efficiency of its panels, which should help to reduce costs.
3) Germany Module Shipments Look Weak : In 2012, the German government implemented significant reductions in feed-in-tariffs (FIT) for projects up to 10 MW and eliminated FIT's for larger projects. This has had a significant impact on First Solar's sales in the region with volumes declining from around 458 MW in 2011 to around 58 MW in 2012 (based on our estimates). We expect that sales in Germany can grow to around 80 MW by the end of the Trefis forecast period as the firm boosts efficiency of its modules and also as lower prices help to drive sales.
4) 'Rest of The World' Module Shipments Should Improve : Sales to the 'Rest of the world' segment also fell by nearly 50% to around 315 MW in 2012, primarily due to decline in sales to France. We expect sales to recover to around 700 MW by the end of the Trefis forecast period as the firm sells more modules to regions like India, Australia, China and Africa.
5) PV Solar Systems Business Revenues Growth Could Slow : Systems revenues grew nearly threefold in 2012 to around $2.1 billion, exceeding our estimates. However, we have some doubts as to whether the firm can sustain this momentum since it has been executing on projects faster than it has been bagging new ones. Over 2012, First Solar had a book-to-bill ratio of 0.8, which means that the firm sold more contracts than it added. To account for this uncertainty, we have lowered the growth rate for systems revenues to around 2.5% per year meaning that we expect revenues to grow to around $2.6 billion by the end of the Trefis forecast period.
6) Margins For Systems Business : Most of the projects for which the company has been recognizing revenues over the last year were negotiated a few years ago when the solar sector was healthier and pricing power was still strong. However, we believe that profitability could be impacted going forward by the currently weak solar power market which could lower the pricing on new contracts that the firm signs. We expect margins for the systems business to decline from around 44% in 2012 to around 27% by the end of the Trefis forecast period considering the possibility that new deals are signed at less attractive rates and also accounting for higher competition.