First Solar (FSLR) Prospects Remain Bright Despite Disappointment

Remy Merritt  |

claiming revenue of $544 million and an EPS of $0.04.

The market responded as it always does with poor earnings reports, and the opening bell initiated a drop of 3%.

However, First Solar has since released public statements that attribute its failure to meet analysts’ expectations to its business model, which focuses on large-scale projects and thus large but intermittent payments. The company announced on Aug. 5 that it has set a world record of 21% solar cell efficiency despite a difficult second quarter, and as an industry leader, First Solar shows no indication of losing steam.

Quarter to Quarter Earnings Volatility All Part of the Plan

Some solar industry companies such as SolarCity (SCTY) operate through equipment leases for small-scale projects, resulting in more stable earnings over the long term. However, First Solar focuses on large-scale utility projects that directly affect earnings depending on which projects are starting up and shutting down.

CEO Jim Hughes noted that the company’s decrease in revenue “is primarily attributable to achieving revenue recognition on our Campo Verde project in the prior quarter and project delays in the second quarter which resulted in the deferral of some revenue recognition to the second half of the year.” The effects of this delay were softened by a 10.1% decrease in operating expenses, a sign of positive company health that was shadowed by the Campo Verde deferral.

Pipeline is Strong with No Plans to Drop Projects

First Solar has been working to boost margins by building utility solar and photovoltaic plants for major national and international companies, simultaneously improving the use of solar in manufacturing and ensuring its own long-term profit. It is maintaining a year-to-date value boost of 20% and is one of the top solar industry performers.

Though the solar supplier focuses on large-scale projects, it is not overlooking the residential and commercial market and, in late 2013, announced it would enter into rooftop installations. This diversification of interests is intended to promote more stable cash flow as First Solar moves to incorporate consistent small-scale projects and revenue rather than relying on massive installations with more substantial earnings.

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Its largest project currently in the pipeline is a 121-megawatt instalation in northern Chile, for which it received as much as $290 million in loans from two private capital corporations. The project, titled “Luz del Norte” or “Northern Light,” will earn First Solar full credit for building the largest photovoltaic solar plant in Latin America. Nods of approval have been given from both US government and international financial departments. The US development finance arm, Overseas Private Investment Corp. (OPIC), offered up to $230 million, and World Bank Group-affiliated International Finance Corp. (IFC) approved a $60 million loan.

Additionally, analysts at Deutsche Bank assured clients the solar company is maintaining its full-year EPS and cash flow targets and has an increasing pipeline of projects. Needham and Co.’s Edwin Mok raised his ratings on First Solar shares from Hold to Buy, citing a $75 price target. It presently has a Zacks Rank #1, making it a Strong Buy. Because project revenues are delayed, First Solar trades at about 15 times forward earnings.

The news is resulting in a stock upswing, and shares have rebounded to gain 3% from yesterday’s close. It ultimately lead the industry in stock performance for the day; competitors SunPower (SPWR) and SunEdison Inc. (SUNE) are both down 1.02% and 0.31% respectively, while Solar City (SCTY) is up just 2.25%.

Yieldco Decision Nearing

First Solar is also eyeing the prospect of a business spinoff into a separate yield company that would separate volatile activities (such as R&D and construction) from stable cash flows. This yieldcowould serve the same purpose as a master limited partnership, normalizing cash flow for First Solar’s publicly traded division and avoiding results such as those just released. Following the discouraging Q2 report, Hughes expects to make a decision within the next three months, “by the next earnings call at the latest.”

SunEdison’s subsidiary TerraForm ($TERP) made its own IPO this past July 17. A 25-day quiet period on underwriter analyses expires on Aug. 11, and prices are expected to increase once the firm is allowed to release research reports on the SunEdison spinoff. First Solar has stated that it is confident it could pull off a yieldco, but is currently keeping an eye on its shareholders and assessing the ultimate benefit a subsidiary would offer investors. 


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