First Solar (NASDAQ:FSLR): SPWR Announces Big Utility-Scale Deal; Buy FSLR - Citigroup

Citigroup is out very positive on First Solar (NASDAQ:FSLR) following a CA utility PG&E deal supplied by Sunpower (NASDAQ:SPWR).

Based on firm's checks, these deals were the consummation of last year's utility RFQ process and are separate from current utility RFQs. In fact, the ~550MW facility from OptiSolar had been already announced (without PG&E as the customer) in April (for capex of ~$1.80/W). It is very important to keep in mind that SPWR was just about the only reputable game in town at that time as FSLR was not yet servicing the utility scale market, only acquiring capabilities to do so (via its Turner acquisition) in November 2007.

Pricing appears very aggressive — Again, based on checks, they think pricing on these deals is as low as ~$0.12/kWh - a level where FSLR can make very good money, but a level where they can't see SPWR getting much more than ~10-15% OpM - about in-line with C2007 levels, but well below the current CQ2:08 run-rate.

While the market will almost certainly take this positively for SPWR and may even draw a negative conclusion for FSLR, Citi would be buyers of FSLR on the news and not SPWR. It appears SPWR is racing to sign big deals - even at the eventual expense of margins - ahead of lower-cost suppliers like FSLR in an attempt to build scale and worry about margins later. As for FSLR - which has not had any major announcements while SPWR has been on a binge - checks suggest a largescale announcement may be forthcoming in the near-term.

Reits Buy and $450 tgt on FSLR.

Notablecalls (as disted on NCN): With SPWR up 9%+ here I think FSLR will see at least a 3-4% move as well. Could do $270 early on.