North Coast Solar Stocks

June 25, 2009

First Solar Reaching Fair Value

Filed under: FSLR — Tags: , , , , , — Jason @ 2:09 pm

Canaccord Adams downgraded the stock to Hold citing a lack of catalysts.

By Canaccord Adams ($171.19, June 25, 2009)

WHILE WE LIKE First Solar (FSLR) as a long-term leader in the solar energy space, we are downgrading the shares to Hold from Buy as near-term pressures and a lack of positive catalysts cause us to conclude that the shares are near their fair value. We maintain our $180 price target, which is based off of a 25 times multiple of our 2009 earnings-per-share estimate.

First Solar hosted a highly anticipated analyst day — its first in well over a year. The company laid out ambitious targets with respect to module efficiency and throughput, but alluded to little else in the way of some of the positive announcements we were looking for.

First Solar remains the leading solar company, in our opinion; however, the company issued fairly ambitious targets with respect to the project pipeline and technology advances, and a lack of visibility into further positive catalysts remains. Additionally, the company’s business model and financial model are changing fairly significantly.

As we suspected, the company’s new focus will lower gross margins but likely increase income in absolute terms. While the company has finally properly set expectations, we believe that the decreasing margin profile may turn some investors off until the higher income and cash flows actually materialize.

It will continue to recognize module sales as revenue on shipment, turnkey systems as a percentage of completion, and development projects as an asset sale with the gain/loss as an operating expense. The company will strive to focus on return on net assets (RONA) and economic value add (EVA), as the company (rightfully so) believes these are strong metrics for measuring the generation of shareholder value.

Further, empirical evidence has shown a strong correlation with share performance and these metrics. While it would prefer not to define its business in terms of its margin profile, it did lay out a roadmap to 35%-40% gross margins as part of its strategy to diversify downstream, but noted that income in absolute terms and RONA targets should remain.

First Solar is targeting all three possible utility entry points: through regulated/public utilities directly, through the utility affiliate independent power producers, and through unaffiliated power producers. The OptiSolar acquisition in early 2009 gave First Solar 1,400 megawatts of U.S. utility-scale projects, in various stages of negotiation. It also acquired 136,000 acres of strategic land rights and 8,600 megawatts of interconnection positions. The company believes that these items, as well as its existing projects, make up the country’s largest utility-scale pipeline.

While First Solar is certainly well positioned in the U.S., we believe the above figures should be discounted given the early stages of some of the negotiations and uncertainties in legislation, permitting, etc. First Solar estimates it currently takes almost 18 months to four years to site a large project from inception to the beginning of physical construction in the U.S.

For comparison, its installer customers in Germany can site a large project from inception in under a year. Part of the [difference] is related to different permitting and other procedural differences, but First Solar has indicated that there are areas that it can improve upon, and is focusing on these areas as it grows into its EPC [engineering, procurement and construction] business. The company has gained valuable experience with the El Dorado plant, and is fine-tuning the system design, construction methods, materials, etc. The company is confident that it can climb the learning curve on project development but stressed that it will likely take some time to do so.

For the first time essentially since the IPO [initial public offering], the company has updated its technology roadmap. First Solar has outpaced the efficiency gains of crystalline silicon, having increased from an average of approximately 5% in 2001 to the 10.9% currently, compared to silicon which has only improved by around 200 basis points in the same time frame. The company claims strong visibility to 12.5% cells in the near- to midterm (2012), and it believes that 16%-18% is a practical production potential toward 2014.

Almost all areas can still be improved upon including: optical engineering, contact engineering, grain-boundary engineering, band engineering and dopant engineering. The company maintains its projection of $1.00 per watt for the balance of systems by 2012 and has extended its forecast to 91 cents-98 cents per watt by 2014. Similarly, it is maintaining its module-manufacturing-cost projection will reach 65 cents-70 cents by 2012 and extended it to 52 cents-63 cents per watt by 2014. This cost decrease is driven largely by the efficiency improvements mentioned above as well increased throughput. First Solar projects that its average nameplate capacity will rise to 80 megawatts from a current 49 megawatts by 2014.

— Jonathan Dorsheimer
— Josh Baribeau

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