Even the best thin film manufacturer in the world is not immune to the effects of overcapacity and the downward spiral that is occurring in solar module pricing. While the firm believes FSLR will remain the low cost producer of a solar module over the next several years, the company is facing a much more difficult margin environment going forward and it is now done with the high-growth portion of its capacity ramp. With module pricing likely to remain under intense pressure through 2010, and little new capacity likely to come on-line through the end of 2010, they believe the risks to First Solar's earnings are to the downside over the next four to six quarters. They are reducing their price target to $96 - 17X Soleil's $5.65 per share estimate for 2010.
One Era Has Ended At First Solar; A Newer, More Difficult One is Beginning - The last three years has been characterized by: 1) Large subsidy programs (relative to the industry's production capability); 2) Steady to HIGHER module prices; and 3) Massive increases in FSLR manufacturing capacity (from three 25 MW lines to twenty-three 55 MW lines in a little over three years). Earnings increased explosively in this "best of all world's" environment. Over the next three years, we are going to see almost the polar opposite: 1) Small subsidy programs (relative to the industry's production capability); 2) declining pricing and margins; and 3) Relatively modest growth in FSLR's manufacturing output. With unit margins on each module declining and little capacity growth, Soleil believes the risk to First Solar's earnings are to the downside - the era of continual upside earnings surprises is likely over.
Soleil believes each of those factors is going to be radically different going forward. The next 12
to 18 months is going to be characterized by:
Subsidy Programs Becoming Small Relative To Industry Capacity – In a world where the solar industry was capable of producing roughly 2 GW per year of modules (2006/early 2007), the subsidy programs that drove the industry (Spain and Germany) absorbed all the modules that were produced. The first signs of danger for the industry became apparent in Q3 2008 (and had nothing to do with the global financial crisis) when Spain instituted a hard cap of 500 MW on its market for 2009. This was the first sign that subsidy programs for solar were not going to be infinite in scope. (It was a given that, at some point, we were going to discover that demand was not infinite...the only question was when). With the industry's manufacturing output scaling rapidly (toward 20 GW or more in late 2010), many producers in the industry have already confronted an environment in which they are not able to sell all they are capable of producing. It is worth nothing that in just the last three to four weeks, there have announcements relating to over 3 GW of thin-film module capacity that will be on-line/producing over the next 18 months - Nanosolar (private), Solyndra (private), Sharp (6753.T - Tokyo - Not Rated) and Showa Shell (5002.T - Tokyo - Not Rated) have all made announcements about large amounts of capacity that will be up and running over the next 12 months (cumulatively over 3 GW). Capacity continues to expand throughout the solar industry. With significant oversupply of modules now facing the solar industry for the first time, and many producers struggling to sell all the modules they are able to produce, the firm believe sthe odds are above 50% that over the course of 2010 First Solar will not be able to sell 100% of its manufacturing capability. The volume assumptions in First Solar earnings models are at risk to the downside, we believe, for the first time since the company came public in late 2006.
Rapidly Declining ASPs – The pricing environment in the solar industry has changed radically over the last year. The industry has moved from ultra-high pricing (driven, primarily, by an overly attractive subsidy program in Spain) to an environment of significant overcapacity that is forcing pricing and margins down at every step of the solar value chain. Crystalline module prices in the third quarter of 2009 are, Soleil estimates, going to be more than 50% below where they were in the prior year. Wafer, cell and module prices are now declining 20% or more per quarter, as the industry wrestles with a relentless expansion of capacity in the face of stagnant demand. First Solar's management acknowledged the reality of this changed environment on the company's second quarter earnings conference call by announcing that it would institute a rebate program on its module sales.
Crystalline-Module Pricing At No Premium - Thin-film modules must sell at a discount of roughly $0.07 to $0.10 per watt per efficiency point to compensate for higher balance of system costs. Assuming 14% to 15% module efficiency for the average crystalline module producer, crystalline module prices are now selling essentially at parity to First Solar's modules (just under 11% efficiency). As polysilicon costs continue to decline, and take crystalline module prices down with them, First Solar is going to have to reduce their module prices in response (as witnessed by the institution of a rebate program early in the third quarter.
Little Growth In Manufacturing Capacity at First Solar – First Solar's physical output of modules is not going to increase dramatically going forward – the company has stopped adding new manufacturing sites (it could gear up again at some point in the future, but we have now gone from one site with 7 lines to three sites with 23 lines – a more than seven-fold increase.) After a seven-fold increase in the number of production lines in just over two years, we are now entering a period where the number of lines the company is operating is basically not going to increase. The ending of ultra-rapid growth in unit output is a very significant turning point for First Solar.
Reducing 2009 and 2010 Estimates
Soleil is reducing their estimates earnings estimates for First Solar for both 2009 and for 2010 due to the increased downward pressure they see on pricing throughout the solar industry in general and at First Solar specifically. For 2009 they are reducing their estimate from $8.10 per share to $6.80 per share. For 2010 they are reducing their estimate from $8.25 per share to $5.65 per share
Risk to Consensus Estimates Is Now 90% To The Downside.
First Solar has surprised to the upside every quarter since it came public - usually by a significant amount. We just do not see that happening in the coming quarters. Looking forward into 2010, however, the company does not have the additional capacity coming on line to drive the monster "beats" to consensus expectations that have been its hallmark over the last three years. It is worth noting - in a declining ASP environment and with no significant capacity additions in the offing - that the current quarterly revenue and EPS estimates for the back half of 2010 (Q2 $585mm/$1.71 per share; Q3 $640mm/$1.88 per share; Q4 $686mm/$2.06 per share) imply the addition of roughly 50 MW of capacity each quarter (200 MW of annual capacity - each quarter) at high margins. Soleil believes that is extremely unlikely in the current environment and believe the risk to First Solar's consensus estimates are almost all to the downside.
Notablecalls: First of all, I'm sorry if I put out too many details. But this call from Priceton Tech Research's Paul Leming is just so good. Excellent job! If you actively invest/trade in the space I suggest you contact these guys.
Contact : PTLeming (a/t) PrincetonTechResearch.com
I think this call has the potential to hurt FSLR today to the tune of 5 pts (or more). The stock has bounced 15-20 pts from its current lows and it kind of looks like downside is coming.
The Street low target is currently $86 from Kaufman but they have messed up their timing badly so I would consider Leming's $96 the true Street low at the moment.