Bottom line. "We have reviewed FSLR's 10K which provides additional segment and other disclosures. We are revising our 2013 rev/EPS from $3.38bb/$5.44 (from 1330MW of project revenue recognition) to $2.68bb/$2.92 (from 1072MW of projects). While the EPS is much lower - it is primarily a placeholder to reflect uncertainty in timing of revenue recognition of projects. We leave our $23 PT on FSLR unchanged. Our valuation methodology for FSLR relies on the company's projected cash flows from existing backlog (there are NO changes there), the company's ability to lower costs (we still believe FSLR has the potential to be competitive longer term) and the company's ability to generate new pipeline (we are hoping to hear more on this front at analyst day, but see FSLR as having some core competencies). We are less concerned on revenue & EPS timing but we do consider FSLR's competitiveness in winning new contracts for its utility scale business. We are lowering our 2014 EPS estimates to $2.37 from $4.48."
FSLR has some positives that should provide downside support near our PT. "FSLR disappointed last week on cost reductions and more importantly did not book sufficient projects into backlog noting that it lost bids to other EPC players likely using cheaper panels. But there are some positives: (i) FSLR's balance sheet will likely continue to strengthen and we think the company will acquire more pipeline; (ii) The company's latest achievement on 18.7% efficiency is a fairly remarkable achievement - we think the company will lower its long term cost target at the analyst day in May; (iii) Some of FSLR's EPC contracts could qualify for incentive payments (could be as much as 10% of value) at the time projects are completed. There are several projects that should achieve final completion milestones in 2013/14/1Q15 (eg - Topaz, Desert Sunlight, Agua Caliente, AVSR, Campo Verde). (iv) Permitting, sale of projects and conversion of certain projects from mid-stage to backlog have limited color on 2013 guidance - these could be alleviated by the time of analyst day."
Valuation. "We are ascribing the following values to the sum of parts: (i) Projects value, less expected capex, opex, taxes and cash losses from panel business through end-2014 plus current net cash: $17/share (the primary driver of value here is FSLR's disclosure of $2.8-2.9bb in net-cash receipts through 2014 from existing contracted pipeline, less modest losses at current levels that we expect to continue in the panel business and our assumptions on opex/capex); (ii) Panel business valued for option value post 2014 @ 0.2x replacement value at $2/share (this is the multiple for value that gives an IRR > WACC for an acquirer of FSLR's manufacturing assets at our assumed level of profitability longer term for panels - this value could increase if panel prices continue to increase); (iii) Value for system business to generate on-going new business $4/share (this assumes FSLR generates new pipeline at the bookings rate of 650MW per year; we use the lower end of FSLR's guidance for EPC ASPs; and use an OpM of 5%. We arrive at our PT of $23 from a sum of the parts."
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
