First Solar, Inc. (FSLR)
Some Good, Some Bad; Stock Still Apt to Remain Pressured
4 November 2011 ¦ 17 pages
https://www.citigroupgeo.com/pdf/SNA93495.pdf
The good — After making a CEO change and hastily releasing results last week,
management effectively quelled concerns that the decision was related to anything
more than a change in strategic direction and “fit”. Additionally, a “new” target of 14%
(mid-pt) module efficiency by 2014 is re-assuring, albeit not out of line with our – or
probably most others’ – model. Finally, we learned just how much the captive EPC
pipeline is helping earnings as we calculate FSLR sold modules into these projects
(mostly Agua Caliente at this pt) at ~$2.20/W, or >$1.00/W above merchant pricing,
thus adding ~$1.70 in EPS just within the Q.
The bad — Inventory becoming big issue and 1H:12 will be very challenging as FSLR
is apt to run factories at much less than full utilization. CQ4 EPS still decent because it
is shipping ~300MW into the EPC business meaning it can hit the low-end of its module
revenue guidance with having to sell essentially very little product into the merchant
market. This sets up a big risk for CQ1, however, as its ability to prevent a very ugly
EPS number (we think it may actually lose money in CQ1) hinges wholly on shipping a
lot of MW in the EPC projects where timelines have been slipping, at the margin.
Estimates/stock summary — Relatively few changes to our estimates with C2012
EPS tweaking barely lower from $5.36 to $5.32 but now heavily skewed to 2H:12 as we
are modeling a slight EPS LOSS in CQ1 on concerns it will be able to do only 100-
150MW in the EPC business and merchant module pricing likely ~$0.75/W, or about
where FSLR’s costs are today. C2013 EPS down slightly from $7.46 to $6.75. In terms
of valuation, we still see the NPV of the cash flows from the pipeline at $20 for the next
2 years and ~$30 assuming it continues to add ~500MW/yr – reasonable given the
amount of coal generation capacity that must be replaced in the US. While the module
business is losing money in 2012 and 2013, long-term EPS power is still ~$3.00, in our
view, which, at 10x, implies a ~$60/share sum-of-the-parts although we acknowledge
the stock is apt to continue to face near-term headwinds if we are remotely correct
about an EPS loss in CQ1:12. Cut target $70 to $60 on lower estimates, maintain Neutral |
