First Solar ( FSLR ) and its competitor Suntech Power ( STP ), the two largest manufacturers of solar modules in the world, recently discussed the impact that potential cuts in solar subsidies by European governments would have on their profitability. The companies predict a substantial decline in their sales figures in Germany, Italy and France - a situation which is expected to be further aggravated by an accompanying fall in prices of solar components in the region. First Solar's other competitors include SunPower ( SPWRA ) and Yingli Green Energy Holding Com ( YGE ).
We have a price estimate of $144 for First Solar's stock, which is about 10-15% above the stock's current market price.
First Solar has benefited from its focus in Europe…
In its 2010 annual report, First Solar attributes the significant growth in the European solar market to renewable energy targets set by the European Union ( EU ), which prompted governments in the region to come up with various feed-in tariff (FiT) programs and subsidies to promote the adoption of solar energy. Germany has led the growth in the region's solar market in recent years, and was responsible for 46% of First Solar's sales in the year 2010. France and Italy respectively contributed 14% and 9% of the company's total sales numbers last year.
The 3 countries, hence, contributed to almost 70% of First Solar's sales in 2010.
… but the scenario in the region will change very soon
The changes proposed to the FiT structure in these countries would result in lower demand in the region. This would in-turn lead to a significant inventory build-up and a reduction in prices in what is First Solar's core market.
To understand the impact on First Solar due to lower sales of photovoltaic (PV) modules in Germany, if we assume that sales even remain stable at the 2010 figure of 677.5 megawatt (MW) for the years to come, this represents a 7% fall in our $144 price estimate for the company.
Although we already forecast a steady decline in the average price per watt generated by First Solar through sales in Germany, the loss in value can be further compounded by a quicker-than-estimated decrease in average PV prices in the country.