First Solar -- shorting the stock, earnings and acquisitions
As you may have read in Why I Am Short First Solar, Bronte Capital has taken a contrarian view of the solar market leader (Former solar market leader, actually. Sharp looks to have regained the number one global supplier spot with $2.2 billion in revenue in 2009.) This week's earnings report from First Solar, the PV price leader, did nothing to bolster Bronte's stand.
John Hempton of Bronte Capital provides some more data for his short position here. Here's a brief excerpt from his lengthy response.
- What is driving the Chinese manufacturers is manufacturing efficiency as well as conversion efficiency. The Chinese processes are difficult -- involving sawing, lacing wires on wafers and assembly. There are many more and difficult steps than First Solar’s thin film process. That is bad for them now but provides opportunity. Chinese manufacturers are -- if we know anything about them -- relentless in taking out costs. So my guess is cost-per-watt will fall faster in the Chinese silicon manufacturers than in First Solar precisely because there are more opportunities for manufacturing improvement.
Greentech Media Research analyst Shayle Kann did a good piece on First Solar's acquisition of project developer Nextlight Renewable Power. Shayle writes that the acquisition, "ensures First Solar's near-term dominance in the U.S. utility-scale project development game."
And many believe that this acquisition puts SunPower on its heels. SunPower's stock felt that impact this week despite their 40 megawatt PG&E project add-on and their Flextronics - California manufacturing announcement.
Excerpts from the analysts on First Solar's earnings
Overweight and Buy ratings
Thomas Weisel Partners' Jeff Osborne on First Solar
- First Solar reported very strong results for 1Q10 with EPS of $2.00 and revenue of $568.0 million beating our and Street expectations of $1.76/$546.8 million and $1.63/$540.6 million respectively. Strength in Germany, France and Italy aided results coupled with a rising price environment and less reliance on rebates. Guidance was increased for 2010 due to better pricing and a mix shift from systems to modules as management capitalizes on strong demand in 2010 from customers and shifts to a more captive demand with internal systems in 2011.
- We expect the stock to be strong in the near term due to upward estimate revisions and short covering. In our view, First Solar is one of the few solar companies developing a coherent and identifiable strategy for 2011. The NextLight acquisition accelerates this further, bringing the contract development pipeline to 2.2GW. Additionally, on an increased confidence on outlook, the company's Board has approved the addition of a four line factory to become operational in 4Q11.
- In the more medium to longer term, we do not envision a scenario (given current technology) where silicon PV will be able to keep up with First Solar's aggressive cost reduction road map. We believe that First Solar remains well positioned for longer term success and has the potential to pick up significant share given their significant cost as well as first mover project developer advantages, especially in their target markets like the US.
Bank of America upgraded shares of First Solar from neutral to buy.
Brigantine Advisors reiterates its Buy rating and raises the price target from $144 to $150.
- “Investor sentiment in the solar sector has been weak for much of this year, and we think the strong report from First Solar will go a long way to allay most concerns. The company is benefiting from the expected reduction of German feed-in-tariffs within the next few months, and the company’s entire 2010 production is sold-out. As a result the company is pushing out some of its systems business, even as its pipeline grew further even without the contribution of NextLight, whose acquisition was announced yesterday. The company plans to increase its production capacity by nearly 60% by 2012."
Deutsche Bank upgrades from Hold to Buy and raises price target from $125 to $155.
- First Solar reported strong 1Q10 results, raised full year 2010 guidance, announced another capacity expansion for 2011, and padded its pipeline with an acquisition. The company has demonstrated great flexibility with its business, and has built a captive project pipeline that can insulate the company should individual markets wither, or module ASPs come under great pressure. We are raising our 2010 and 2011 EPS estimates, upgrading FSLR to Buy, and raising our price target to $155.
- Positive outlook, even for the most conservative company in the group
- First Solar will likely be capacity constrained through 2010; should an oversupply reassert later in the year, the company can execute on a project pipeline to ensure full production sell through, and solid EPS. With capacity expansions (which could happen a bit faster than announced), a captive project pipeline, a 1H10 loaded year discounted (near-term demand strength continues), and EPS growth forecasted for 2011, we are more sanguine on the company’s ability insulate itself in a volatile industry. In this environment, we think the outperformers will be the low cost producers, particularly those with strong captive project pipelines; First Solar may be the only company that truly fits this profile. We believe for now it makes sense to own the industry benchmark name.
- As the industry LCoE leader, with a strong long-term pipeline, and the strongest company fundamentals in the industry (e.g., long-term LCoE advantage, strong positive cash flow, strong balance sheet, a track record of solid execution) offset by pricing pressure and margin compression, we believe the company deserves a premium valuation to peers.
Hold/Neutral Rating
Canaccord Adams maintains its Hold rating but raises price target from $130 to $140.
- “The beat and raise is a result of some favorable pricing as well as allocating more of its manufacturing capacity to direct module sales mix over its own captive development pipeline, both made possible by the overwhelmingly tight macro environment. However, we still believe the impending mid-year subsidy cut in Germany could lead to a potential slowdown, forcing First Solar to re-allocate more capacity into its systems business to buffer the fluctuation in demand. While these sales carry greater revenue contribution and in the long run may enable larger-scale, industry-wide solar deployment, the loss of leverage associated with the shift will likely lead to downward pressure on the stock’s multiple from any near-term strength.”
Citigroup maintains Neutral rating and price target of $135.
- “Strong Q/guide and most importantly announced some new capacity adds (as we suspected) given new focus on share gain and demand for its product that remains very high. With the stock near our $135 target, however, and minimal changes to our estimates (consensus most likely to come up), it is hard to argue risk/reward overly compelling unless one builds a case for EPS to break out of the ~$7.00+/- $0.75 range. More of FSLR’s revs will go to pre-negotiated PPA deals in 2011, but we are still hard pressed to see much if any EPS growth in 2011 as pricing seems apt to be a bigger headwind given the alleviation of wafering bottlenecks for competing silicon product, ongoing poly oversupply, and potential demand perturbations due to pull-ins this year.
On China PV
China is now the number-one global producer of photovoltaic cells. They were barely on the map a few years ago in solar production. There is $3 billion in Chinese government stimulus for solar. Compare that with last week's announcement from Secretary Chu allotting $200 million for solar and water power technologies. The Chinese government will fund 50 percent of the cost of very large solar (>500 megawatt) installations and expects their solar market to increase to 20GW by 2020.
Solar Startups
VC-funded startup Senergen shut down and microinverter startup SolarBridge won $15M in VC funding.
Every startup from Abound Solar with their CdTe process to newly and generously-funded Amonix with their high-concentration PV is using First Solar as the gold-standard in price targets for their product.
Low-concentration panel vendor, Solaria, started shipping panels this week. According to the firm, Solaria modules are specifically optimized for tracking systems and large-scale installations.