First Solar (NASDAQ:FSLR) released their Q4 results last week. Although operating profit was higher than expected for the quarter, revenue came in under $100m below expectations. On Friday, investors punished the share as a result and shares ended nearly 7% down. More drops like this may also be on the horizon, but could this share eventually charge higher in the coming months and years?
First Solar Inc was founded in 1999 and designs and manufactures solar modules. The current strategy is comprised of 2 main segments – module sales & systems. Module sales are simply solar modules that are sold to other companies, whereas systems is primarily around project based work where First Solar is responsible for the development of various solar based projects. For systems, revenue can be inconsistent and margins can vary. At the moment, the module sales comprise of only 20-25% of sales, vs system sales that make up the majority. Over the next 3 years however, the company is looking to become more focused on module sales as opposed to system sales.
Although the company was founded in 1999, the company didn’t become a publicly traded company until 2006. Since then, the share prices has had some lofty highs. The share price even reached as high as 260+. Over the past couple of years however, the share price has fluctuated between 20 and 70 almost like a yo-yo (see chart below).
From the chart, it looks as though we are at the top of a cycle about to enter another downturn. It would appear that the negative Q4 results could be a catalyst for a possible downturn.
Let’s dig a bit deeper though and take a look at what the numbers from the FY report
- FY2017 revenue of $2.9 billion
- Cash and marketable securities of $3 billion
- 2018 forecast has been raised to $130 – $180 mln in operating profit although capital expenditures has also been raised to $700 and $800 million
- Current market capitalization of $6.45 billion
One thing that stands out here is the cash position of the company. The company has roughly $3 billion in cash & marketable securities! There aren’t many solar based companies out there with these sort of numbers. Indeed, in the FY report, mention is made of First Solar’s balance sheet as being one the most solid in the business.
Now, let’s take a look at the potential revenue First Solar could be generating in a few years time. The company is looking to shift focus so that the majority of revenue in a couple of years time is generated from module sales.
Based on the company’s investor plan, the company has forecasted 2020 production capacity to be double that of 2018 (~6 GW in 2020 vs ~3GW in 2018). The forecast from the company investor presentation suggests that $2.9 billion will be generated from 3GW capacity in 2018. Taking a simplistic view of the numbers, if 3GW output for 2018 produces $2.9 billion in revenue with $130 – $180 mln operating profit, roughly 6GW in 2020 should produce roughly double this number. However, recognize that for 2018, the $130 – $150 mln in operating income is produced taking into account certain costs (the company has pencilled in $110 million for production start up expense + $70 million for restructuring and ramp up costs). Without these costs the $130-$180 million then transforms into a number more like ~$310-$360 million, This is at 3GW production capacity. In 2020, we’re taking about double the production capacity. (i.e numbers like $610 mn – $720 mn. Of course, the above includes a lot of assumptions, but at 10X multiple, you can see why the current $6.54 bn valuation may be considered an OK valuation. Granted, this does not take into account the cash sitting on the balance sheet, so it could be argued that the company may be slightly undervalued.
Personally though, if I was looking for near term gains, I would not purchase the share right now, as I suspect that the share may dip some more because of the disappointing Q4 results. If however, the share manages to venture into <$40 territory, I would definitely take another look.
Likes
$3 Billion balance sheet
Moving to strategy of majority module sales
6GW capacity in 2020
Dislikes
Share goes through cycles – possibly because of the unpredictability of systems sales
Risk that 6GW capacity won’t be reached
As always though, please do your own research before buying/selling this share; the opinions above are only my personal views.
