Monday, February 15, 2010

First Solar Inc. (NASDAQ: FSLR): Q4 Earnings Preview 2009

First Solar Inc. (NASDAQ: FSLR), the world's largest maker of thin-film solar-power modules, is scheduled to release its fiscal fourth-quarter 2009 financial results after the closing bell on Thursday, February 18, 2010. Analysts, on average, expect the company to report earnings of $1.50 a share on revenue of $579.72 billion. In the year ago period, the company posted earnings of 93 cents per share on revenue of $433.65 million.

First Solar Inc. engages in the design, manufacture, and sale of solar electric power modules using a proprietary thin film semiconductor technology. The company's solar modules employ a thin layer of cadmium telluride semiconductor material to convert sunlight into electricity. First Solar has the lowest production costs in the industry for its thin film cadmium telluride panels. The company broke $1 per watt in 2008 and reached 85 cents per watt in 2009.

In the preceding third quarter, the Tempe, Arizona-based company reported that net income surged to $153.34 million or $1.79 per share, from $99.27 million or $1.20 per share, in the prior-year period. Quarterly revenue rose to $480.85 million from $348.69 million. Analysts, on average, expected the company to report earnings of $1.74 per share on revenue of $528.78 million quarter.

In December, the solar module maker said that it expects fiscal year 2010 earnings to be in the range of $6.05 to $6.85 per share. Sales for the fiscal year 2010 are projected to be in the range of $2.7 billion to $2.9 billion. The company anticipates consolidated gross margins for fiscal year 2010 to be 38% with operating margins of 23% to 24%, influenced by a mix shift to the systems business, which includes $0.6 billion to 0.8 billion of EPC/project development.

First Solar plans to invest about $365 million capital to add two production plants, consisting of four manufacturing lines each. The expansion is expected to increase First Solar's annual capacity by 424 megawatts, assuming the third quarter 2009 reported annual line run rate of 53 MW. In addition to the Malaysian expansion project and the previously announced two-line factory in France, First Solar expects to add 10 production lines during 2010 and 2011, increasing capacity by over 48% from current levels, bringing its annual or announced production capacity to about 1.8GW based on current production levels.

Total capital spending is projected to range from $500 million to $550 million, including the Malaysian expansion. As a result, the company expects to generate $730 million to $790 million of operating cash flow and $180 million to $290 million of free cash flow.

Last year, solar industry suffered heavily as turmoil in the credit market forced financial players to abandon U.S. solar energy projects. The 2008 collapse of top solar financier Lehman Brothers and the freeze-up in the global credit markets drove nearly all banks to halt funding for major new solar projects, forcing the makers of systems that turn sunlight into electricity to cut prices for their products and sending their stocks crashing. The problems of solar companies had been further compounded by an oversupply of polysilicon, a material used in solar panels. Moreover heightened competition from Chinese solar companies too has impacted the US solar industry.

However, the industry as a whole is likely to benefit from growing attention to global warming, skyrocketing oil prices, cheap financing and technological advances. At the Copenhagen Summit held in December 2009, the five major polluters of the world agreed to take action to reduce CO2 aggressively, with $100B per year pledged to help developing nations adopt green energy technology to cut greenhouse gas. Meanwhile, the US, China, Brazil and India continue to invest heavily in wind and solar energy with China's $454B in the next 5 year period as the most aggressive one. As part of the stimulus bill signed last year, the federal government approved around $60 billion in loan guarantee authority and $30 billion in energy grants for renewable energy and transmission companies. Congress has also granted a 30% renewable-investment tax credit to help expand the development of alternative sources of energy. First Solar anticipates the overall global demand for solar energy equipment to reach 7.5 gigawatts in 2010.

In the near term, the solar industry is facing an important challenge in the form of reduced government subsidies. Globally, solar industry depends upon government subsidies and incentives and support to remain competitive. However, recent developments suggest that subsidies will inevitably be reduced or phased out. According to media reports, the German government is lanning to cut solar subsidies for new roof and open-field sites from April by 16 percent to 17 percent. Additional cuts to the subsidies will be made from 2011 if solar projects amount to more than 3,000 megawatts, and even more if they total more than 3,500 megawatts. Already, France in January slashed the tariffs for electricity produced from rooftop solar panels by 24 percent. Spain too has taken similar steps. Most solar panel maker generate the bulk of their revenue from Europe. It is worthwhile to mention that First Solar generated 60-70% of its sales in Germany last year.

The company's stock currently trades at a forward P/E (fye 27-Dec-10) of 18.01 and PEG Ratio (5 yr expected) of 0.54. In terms of stock performance, First Solar shares have lost 22 percent over the past year.

Full Disclosure: None.

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