Another Way Of Looking At First Solar, Inc. (NASDAQ:FSLR)
The global solar industry is not in great health. Weak demand and overcapacity are some of the problems dogging the industry, and First Solar, Inc. (NASDAQ:FSLR) has been caught up in the mess. But these problems are not going to choke the life out of First Solar, and this analysis of First Solar aims to reveal some interesting facts about the company and the global solar industry.
Amid the challenges in the solar industry, First Solar has been making efforts to position itself for strong growth and profitability. However, the company also looks to the recovery of the solar industry for more gains, especially as it expands abroad.
At present, one of the areas where First Solar is facing immense pressure is in its components business. Prices are falling, demand is low and Chinese rivals are driving competition because of their low-cost structure.
Recovery of the solar industry
For the most part, global demand for solar power has been supported by government subsidies. The reason is that solar power remains expensive compared to conventional energy sources. This situation has contributed to the low demand for solar products like those that First Solar produces, especially as subsidies are cut in some markets.
For the recovery of the solar industry and correction of the overcapacity situation, consolidation is needed. However, there are several barriers to achieving consolidation, and China is one such barrier.
Chinese solar companies offer employment to thousands of people domestically. As such, Chinese authorities are unlikely to be supportive of consolidation deals over fears of triggering job losses. Chinese banks have also been willing to offer loans to domestic solar companies as long as they keep their employment numbers growing, regardless of whether they are making gains or losses.
While the systems in China may currently not favor more rational practices, such as consolidation, a time will come, and it could be soon, when tough choices will have to be made.
Given that most Chinese solar companies are currently getting easy bank funding to keep employment, bankruptcies will set in and funding by banks will obviously be restricted. As such, weaker solar companies will lose access to the easy funding they have enjoyed for a couple years, forcing some to fold up or consolidate. At that point, the issue of overcapacity will start to correct.
With industry consolidation and correction of the overcapacity problem, leading solar companies, such as First Solar, Inc. (NASDAQ:FSLR) should be able to register more sales and improved margins.
Superior form of renewable electricity
Besides the slump in the solar industry, caused by low demand and overcapacity, the solar industry faces another risk –continued investment in renewable energy. If the ongoing efforts to popularize clean energy lead to the discovery of a superior form of clean electricity, attention could be shifted away from solar. In that situation, subsidies that have helped create demand for solar power may be cut or completely withdrawn in some cases.
In other words, the solar industry can be volatile for any player, big or small. For one, the solar industry currently relies on artificial demand, created through government subsidies. The other issue is that solar power is generally expensive to generate compared to conventional electricity.
Survival of the fittest
To remain relevant in such a volatile industry, which is already hurt by soft demand, low prices and overcapacity, you need to be smart. Is First Solar, Inc. (NASDAQ:FSLR) smart enough?
First Solar boasts attractive value propositions. The company has an attractive technology roadmap to drive module efficiency. First Solar also has exciting cost reduction plans. By leveraging these advantages, First Solar can get its sales growing and margins improving over a long time.
First Solar registered impressive module efficiency in the second quarter of 2015, which was 15.4% compared to 14.7% in the first quarter of 2014. The company is targeting to notch 18% module efficiency by the end of 2016.
With greater module efficiency, First Solar will be able to generate more energy per space compared to competitors. As such, First Solar will be able to stand a better chance of winning projects and also enjoying higher margins.
Moreover, as First Solar continues to innovate in module efficiency, the company is on the path to making solar power the most attractive form of clean energy. As the most outstanding source of renewable energy in terms of efficiency, affordability and other virtues, the solar industry could end up getting more funding/subsidies or turn tables on competitive renewable energy technologies, some of which could be threatening its survival.
Cost reduction roadmap
First Solar is not only innovating for product efficiency, the company is also working on cost reduction. Already, the company boasts a unique thin-film technology, which offers impressive scope for cost reduction.
By leveraging its technology to cut costs, First Solar is paving the way for its emergence as the provider of most affordable solar components and systems. Chinese solar companies have enjoyed cost advantages over First Solar, which means that First Solar can reclaim some lost market share and grab more from competitors through greater cost optimization.
First Solar’s yieldco with SunPower Corporation (NASDAQ:SPWR) called 8Point3 Energy Partners LP (NASDAQ:CAFD) is another great value asset. 8Point3 provides exciting opportunity and relief to First Solar as the company is able to get projects pushed down to be handled by the yieldco. First Solar owns 31% stake in 8Point3.
Sold balance sheet
First Solar, Inc. (NASDAQ:FSLR) finished the second quarter 2015 with cash and marketable securities worth $1.8 billion, which rose from $1.5 billion in the previous quarter. The strong balance sheet means that First Solar has flexibility in funding R&D projects for better efficiency and cost optimization.
Proof that First Solar is on right track?
Both second quarter 2015 profits and revenue surge
First Solar posted EPS of $0.93 in the latest quarter, compared to $0.04 a year ago. The company benefited from about $42 million in tax gain. Net sales in the quarter were up 65% to $896.2 million.
One can say that the surge in profits in the second quarter 2015 was supported by the tax gain, but the strong growth in net sales sends a strong message that more growth is possible.
For the full-year 2015, First Solar raised its shipments forecasts, with the company now predicting that it will ship 2.8GW-2.9GW. The previous target was 2.6GW-2.8GW.
In terms of sales, First Solar is looking for full-year revenue to come in the band of $3.5-$3.6 billion. EPS is expected to be in the range of $3.30-$3.60.
Looking at the performance results and the ambitious projects, there is tangible proof that First Solar’s efforts are taking it somewhere.
The problem of overcapacity is going to go away as China realizes the need to take more realistic measures in its solar industry. First Solar, Inc. (NASDAQ:FSLR)’s sharp innovative edge will both enable the company to attain personal gains and also make solar power more relevant, thus protecting the industry from external threats.
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