Tuesday, July 26, 2011

First Solar (NASDAQ: FSLR): Q2 Earnings Preview 2011

First Solar Inc. (NASDAQ: FSLR) is scheduled to release its second-quarter earnings after the closing bell on Tuesday, July 26, 2011. Analysts, on average, expect the company to report earnings of 92 cents a share on revenue of $584.05 million. In the year ago period, the company reported earnings of $1.84 per share on revenue of $587.85 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.

First Solar continues its focus on cost reduction with the management taking several steps to further reduce costs over the years to come.
The average manufacturing cost per watt for First Solar modules has declined steadily from $1.47 in 2005 to $0.75 in 2010. This can be primarily attributed to economies of scale and improvements in the firm?s technology and manufacturing process over the last several years.

The company has also focused on expanding manufacturing capacity in low cost manufacturing locations – with a huge chunk of production operations in Malaysia and Thailand. These continuing efforts have led to the management estimating per watt manufacturing costs between $0.52 and $0.63 by 2014 – making the company’s solar modules cost-effective enough to take non-renewable sources of energy like coal and natural gas head-on.

In the preceding first-quarter, the Tempe, Arizona-based company's net income was $116.0 million, or $1.33 per share, compared to $172.3 million, or $2.00 per share, in the year-earlier quarter. Revenue declined to $567.29 million from $567.96 million in the same quarter last year. Analysts, on average, expected the company to report earnings of $1.16 a share on revenue of $544.37 million.

At its last earnings call in May, the company said it continues to expect full year 2011 earnings of $9.25 to $9.75 per share on net sales of $3.7 billion to $3.8 billion. "Despite European market uncertainties, First Solar has good visibility into our demand for 2011," said Rob Gillette, CEO of First Solar. "We continue to execute our cost roadmaps, invest in new module capacity, build our project pipeline and develop promising new markets around the world."

Solar companies have sought to position themselves for market share gains outside of Europe, the world's primary solar-power market, after governments there have cut subsidies that have supported the sector over the past decade. Installations are expected to rise in the U.S., Canada and other markets, although Europe will continue to account for the majority of global photovoltaic installations this year.

Going forward, the company will be ramping up its production capacity to further lower its cost of production through economies of scale. At the end of the third quarter of 2010, the company operated with an annualized global manufacturing capacity of approximately 1.4 GW. The company expects to increase its manufacturing capacity to 46 production lines by the end of 2012, with an annualized manufacturing capacity of more than 2.7 GW.

First Solar, which makes thin-film solar panels that are cheaper to make but convert less sunlight into electricity than traditional silicon solar panels, was the world's top solar-panel supplier last year. While the company remains a top supplier, it faces increasing competition from low-cost Chinese solar-panel makers that are also expanding production to meet growing global demand.

First Solar remains focused on Europe, where the majority of demand is, as well as the U.S. and Canada, where the company has about 2,000 megawatts of large solar farms in various stages of development. The company is also rapidly expanding in emerging markets like China and India, that have a lot of potential, but where demand isn't yet as strong as it is in Europe.

2010 continued the significant growth of the solar market throughout the country with new markets in China and the USA advancing their demand for solar panels. Solar industry as a whole has benefited from continued strong demand thanks to growing awareness about global warming, skyrocketing oil prices, cheap financing and technological advances. Companies involved in the production of semiconductors used in solar panels have enjoyed a positive quarter. Many have experienced rising shipments over the last few quarters, resulting in a sequence of record quarters. The world is becoming increasingly environmentally conscious. Both commercial and private demand for solar power is rising. Solar options are becoming more attractive as more governments provide better options for buildings producing solar power to feed into and out of the grid as required. Meanwhile, US President Barack Obama has called for 80 percent of the nation's electricity to come from clean sources by 2035.

China aims to install 2 gigawatts (GW) of solar energy by 2011 and 20 GW by 2020. As part of this effort the government has taken several measures to incentivize developers and consumers to adopt solar technology. These incentives include the solar PV building program, Golden Sunshine program and PV utility project tenders. A Feed-in-Tariff (FiT) policy is also expected to be announced soon.

In India, the government has set aside land in areas where solar radiation is easily available to foster solar energy growth, and has announced a 30% subsidy to all homeowners who install solar panels on their rooftops. The country aims at installing 20 GW of solar capacity by 2022.

Following Fukushima’s nuclear disaster, Germany decided to go offline with 8 out of its 17 nuclear reactors and phase out the remaining by 2022. We believe this step will boost demand for renewable sources of energy with solar taking the lead. First Solar, being the largest solar modules provider to Germany, will benefit the most.

However, the governments of European countries are cutting back subsidies on solar energy and this could impact First Solar’s sales. This situation could be further aggravated by declining solar component prices in these regions by changes in the FiT structure. Lower demand would result in more inventories thereby pushing solar component prices further and impacting the company’s profitability.

Among other developments, the US government approved nearly $4.5 billion in conditional commitments for loan guarantees for three of the company's projects.

Full Disclosure: None.
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