Why First Solar is the Best Pick in the Solar Industry

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Oct 21, 2014
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With the exponential rise in the solar market, many companies in the industry have grown considerably. The likes of SolarCity (SCTY, Financial) and SunEdison (SUNE, Financial) have multiplied in valuation, while there are a few companies that have struggled. The solar industry is expected to continue this upward trajectory, and therefore, picking the right company can prove to be beneficial for investors. In my opinion, investors should consider buying First Solar (FSLR, Financial) to benefit the most from this market. Unlike its peers, First Solar commands a very conservative valuation on P/E basis and is the only solar company reporting profits on a consistent basis, and the latest quarter was no expection.

First Solar reported net sales worth $544 million in the second quarter, compared to $950 billion last quarter. The operating expenses declined $7 million sequentially to $90 million, while the operating income was $2 million compared to $139 million in the previous quarter. The gross margin reported in the quarter was 17%, down from 24.9% in the prior quarter. The free cash flow for the quarter was $60 million compared to negative $357 million in the prior quarter.

The company produced 447 megawatts DC in the quarter, up 1% sequentially and 15% year-over-year, while the factory capacity utilization was 80%, down two percentage points from the prior quarter. The company’s module delivered an average efficiency 14%, up 0.5% sequentially and 1% points year-over-year.

Capital expenditures totaled approximately $62 million, an increase from $51 million in the prior quarter as we purchased more equipment related to the TetraSun ramp

First Solar expects earnings per share in a range of $2.40 to $2.80 and operating cash flow of $300 million to $500 million while the gross margin guidance range is raised by 1 percentage point from the previous range to 18% to 19%. The operating expenses are expected to range from $380 million to $395 million for the next quarter and the expected revenue increased from $7.5 billion to $7.6 billion.

Bright Future

First Solar recently broke its previous record for CdTe cell efficiency of 20.4% reaching an efficiency of 21%. This also exceeds the multi crystal and silicon record of 20.4% set 10 years ago and the current CdTe’s record that stands at 20.9%. The company aims for cell efficiencies of 22% by the end of the next year.

The company took off with huge wings this year. In module, the company attained an average efficiency of 14%, which is a 0.5% efficiency increase, being the company’s biggest sequential rise. This resulted in reduced costs, thereby increasing its potential margin. Also, more efficient modules will open up ways for new business opportunities and also will increase the total addressable market.

First Solar's operating expenses declined due to fall in personnel costs and relocation costs associated with the sale of its Mesa zone facility. The sequential reduction in expenses is indicative of the effectiveness of the company’s initiatives taken with regard to reducing general and administrative expenses.

The company booked 404 megawatt of declared capacity in the first quarter, conclusively delivering a book-to-bill ratio of greater than 1, while the total outstanding bookings jumped from 2.7 gigawatts to 2.8 gigawatts.

First Solar’s projects business accounts for 66% of the company’s total revenue. The company’s profits are expected to come from the U.S.-based projects like the 550 MW Topaz and the 550 MW Desert Sunlight and it plans on building the projects business overseas. For example, First Solar’s remarkable progress in Chile is credited to the 141 MW Luz del Norte power plant and the company is also working on setting up a 370 MW solar power plant in the Antofagasta region of Chile.

Conclusion

The stock has gained 12% as of now, and is relatively very cheap when compared to other solar stocks. The company is attractively priced and is a great buy for investors looking to benefit from the booming solar market.