From CS on First Solar:
Increase target price
Pricing Upside Delivered
Bottomline – good for FSLR, good for industry. FSLR delivered a solid quarter, raising estimates despite capacity constraints by capturing pricing upside in the market. Commentary also muted two of the top 3 bear concerns on the stock: Company lowered Euro assumption to $1.30 which helps given Europe macro concerns, and noted demand upside from non- German geographies for panels (not systems) is driving company to be supply constrained on 2H10 in spite of the German FiT decline in July. This is precisely our argument on the industry as well – overall demand is tracking closer to 12.7GW we think, still well above cons at 9.9GW – we think what is applicable to FSLR will be applicable to rest of solar as well – in particular, we highlight TSL, SOL and SOLR as beneficiaries from current trends. The third bear concern is 2011 will have tough y/y comps for industry – this still is important given the stock’s multiple, but by pushing out some system volumes to 2011, FSLR made its 2011 argument a bit better. We are raising our PT to $145, representing 20x new CY10 EPS of $7.07, street was at $6.15 before the call.
CY10 revised higher.
Company revised it CY10 rev/EPS from $2.75bb/$6.45 (at mid-pt) to $2.65bb/$7.05. Company also revised its Euro assumption for the unhedged portion to $1.30, below its prior assumption of $1.40. We were expecting that the company was capable of generating ~$6.7-$6.8 in CY10 EPS at $1.35 exchange rate, so the upside was better than our expectations. This upside was driven by: (i) ~45MW of higher panel sales due to stronger demand in CY10; (ii) Higher pricing assumption for the full year (now at $1.50/watt vs. prior assumption at $1.45/watt).
C1Q upside. Company reported C1Q10 rev/EPS of $568mm and $2.00, vs. street at $541mm and $1.63. About 14c of upside came from lower taxes. Rest of the upside primarily came from higher ASPs – we estimate blended pricing was $1.69/watt (up 2.2% q/q), vs. our model at $1.61 (down 2.7% q/q); cost/watt was marginally better at 81c/watt vs. our model at 82c/watt. Better pricing drove higher revenues, and better GM at 49.7%, which was 260bps above our model. We are modeling TSL’s prices at $1.91/watt and $1.77 in 1Q10 – assuming our TSL price assumption does not have upside, the gap between FSLR and TSL will decline from ~25c/watt to just ~8c/watt in 1Q10 – the lowest it has been ever. This provides some support to company’s claims that customers are willing to pay up for FSLR’s higher energy yield and bankability, despite its lower efficiency, but we will need to see at least one more quarter of data to rule out extraneous currency effects
Other points.
(i) Company pushed out some system revenues (est ~125MW or $250mm of EPC revenues) into 2011 – bears will suspect this was inevitable given timing delays are not unusual for system projects – but FSLR argued that these projects provide a cushion in lean periods and the pushouts were not involuntary this will remain a point of debate as bulls will bank on system projects in CY11 to support estimates;
(ii) Panel efficiencies were flat at 11.1% - efficiency is up only 20bps y/y versus 30bps for 12-mo ending 1Q09 and 135bps y/y for the 12months ending 1Q08. Also, cost/watt was only down 1c/watt on apples-to-apples basis. FSLR needs to accelerate its efficiency improvements (as they drive BoS reductions) – as China competitors are starting to aggressively focus on efficiency improvements through improved silicon quality, tighter process control and more advanced processes (eg STP is trying to do electroplated copper in laser defined grooves for Pluto we think, others are trying selective emitters, Varian Semi is trying to use ultra high speed 1000 wafer/hour+ throughput implant to improve efficiencies etc);
(iii) Company has proposed to acquire Nextlight (see note earlier today) to improve its system pipeline.
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