The article was written by Harry Chiang, a Financial Analyst at I Know First.

First Solar Stock Analysis

“Solar power [with] batteries will be the primary means of sustainable energy production…solar power will be the single largest source of electricity generation by the mid-point of the century.” Elon Musk

Summary:

• First Solar continues to impress financially despite troubled times.
• First Solar is restructuring efficiently and gaining increasingly important contracts.
• The current market is favorable towards a lean, primary player such as First Solar.
• I Know First’s algorithm indicates a bullish signal.

Background:

First Solar, Inc. (NASDAQ: FSLR) is an American photovoltaic manufacturer of rigid thin film modules and a provider of utility-scale PV power plants. Founded in 1999, the company currently employs 6,350 workers, operating primarily out of Tempe, Arizona. Under the direction of the current CEO Mark Widmar, First Solar has had an impressive track record.

The company’s unique approach is using cadmium telluride (CdTe) as a semiconductor instead of conventional crystalline silicon technology. This has allowed to break records by producing cells with 21.5% efficiency in 2015 and thin-film PV modules with 18.6% efficiency. It also allows First Solar to have an advantage by producing solar panels at a lower cost. The use of cadmium telluride instead of silicon allowed it to achieve a significantly lower cost module of $0.67 per watt. This is compared to crystalline-silicon PV, which averaged $1.85 per watt in 2010.

First Solar boasts an impressive record in a saturated and vicious market. While other companies declare bankruptcy, First Solar is given a bullish forecast due to the company’s future potential based on current plans.

(Source: Logo Directory http://logosandbrands.directory/first-solar/).

Financial Fundamentals

It is tempting to dismiss First Solar because of its financial reports. It has faced difficulty in the past. In 2012 it witnessed record sales of over $3.37 billion turn sour. Restructuring efforts impacted the bottom line, leading to a net loss of $96.3 million for the year. Furthermore, it also reported difficulty in 2016. The net sales for Q4 2016 were $480 million, a decrease of $208 million from the prior quarter. It also reported a Q4 loss per share of $6.92. Comparably, the company had earnings per share of $1.63 in the prior quarter.

However, the key aspect to focus on here is that these weak reports have always been due to restructuring for future potential growth. Q4 in 2016 was plagued by pre-tax charges of $729 million. These were due to previously announces restructuring actions. The completion of multiple systems projects also impacted the quarter.

It is most important to look to First Solar’s 2017 earnings. In Q1, First Solar reported net sales of $892 million, an increase of $561 from the previous quarter. The company also reported first quarter earnings of $0.09, surprising considering the high loss per share in Q4 2016. Cash and marketable securities increased to $2.4 billion from $2.0 billion over Q1. Cash flow from operations were $493 million in the first quarter.

Remarkably, First Solar beat the estimated revenue in 2017 by 5.1%. It also beat earnings by $0.38. Comparable sales increased by 170% in Q1. Overall, First Solar managed to efficiently handle a tumultuous 2016 in a difficult market. Although this does not mean the company is in the clear yet, as it has a lot of restructuring still planned, these reports are a strong indicator that First Solar is well poised to take full advantage of its restructuring and come out of the process more profitable than ever.

First Solar’s Restructuring & Contracts for Future Growth

As mentioned, First Solar’s current restructuring efforts heavily impacted its financial year. The company recently announced that it was accelerating its Series 6 production into 2018. Mark Widmar, CEO, stated “Although the decision to accelerate our Series 6 road map requires a restructuring of our current operations, we expect the transitions to Series 6 will enable us to maximize the intrinsic cost advantage of CdTe thin-film technology”.

As a result of this transition, the company expects to incur restructuring and asset impairment charges of $500 to $700 million, which includes a cash impact of $70 to $100 million. The company also expects a $220 to $250 million tax expense associated with distribution of $750 million of cash to the United States from a foreign subsidiary. This will provide liquidity for the restructuring of U.S. operations and Series 6 investment.

Although this means that the company is likely to have struggling financial statements in the near future, this is not a cause to be discouraged. Investment in First Solar continues to be strong and the company is gaining more important contracts than ever.

First Solar managed to increase net earnings in Q1 2017 primarily because of the sale of the cash equity interests in the 250 Megawatt Moapa Southern Paiute Solar Project in Nevada to global private asset manager Capital Dynamics. First Solar has recently gained many more contracts from which it could profit and maintain a strong balance sheet. For example, on March 26th, First Solar reached a financial close for the Manildra Solar Farm in New South Wales in Australia. This is a AUD $9.8 million financed project which will utilize 466,000 First Solar thin-film PV modules. Many other examples include the $240 million Mizuho Bank loan for the Ishikawa Sogo Solar Power Plant, the 4.5 GW European expansion through Photosol, and the 26 market distribution through a collaborative sales agreement with Zorlu Holding, S.A. in Turkey.

Overall, First Solar shows signs of troubled times ahead in the short to medium term. However, in the long-term, First Solar looks well poised to capture the international market and efficiently restructure for an even stronger position.

The Current Market Situation Favors First Solar

There is a lot of controversy surrounding the market for solar energy. Fossil fuel’s current low prices are pressuring on the solar market. The market also has issues with companies requiring government subsidies and investments to remain operational.

Companies such as Suniva and SunEdison have recently filed for bankruptcy, falling victim to prolonged sales of cheap solar imports from China. There is a further worry that the solar market is unsustainable because of the struggle to profit. However, the market trend is that all these factors have forced companies to become more lean and efficient. This includes First Solar. The restructuring efforts previously mentioned will lead to First Solar becoming more self-sustainable and a bigger player in a market that will increasingly rely on First Solar.

Furthermore, the world is currently becoming increasingly favorable towards clean energy. 69% of funds in 2016 invested in energy overall, and 52% of these funds invested in renewable. According to PWC, funds raised more than $100B still not allocated towards renewable energy. Companies are committing to going green and using more renewable energy. In 2016, Google announced that it would be powered 100% by renewable in 2017. According to the RE100, 82 other companies have made that same commitment so far.

Current short-term projections for the photovoltaic market predict between 400 and 600 gigawatts capacity by 2020. In conclusion, First Solar is becoming a primary player in an increasingly selective market. It is also poised to be a prominent leader in the movement towards cleaner and greener industries.

Conclusion:

Despite the likely troubles with restructuring costs ahead, First Solar remains a strong contender. Its unique approach and current position are favorable to future growth. Combined with its improvements once it has restructured, these indicate high potential in the long-term. We are maintaining a bullish forecast of the stock.  I Know First’s algorithm forecast the stock as a long term investment.

Past I Know First Forecast Successes With FSLR:

In such as the one dated on June 7, 2015, the algorithm accurately forecast a signal for First Solar.  In a 6 month time span, the stock rose steadily by 37.25%. Unfortunately, this experienced a dip in the latter half of 2016 and the start of 2017 due to restructuring costs. However, as discussed, First Solar is primed to steadily improve once it has overcome the current increased expenditure.

Below is the latest forecast I Know First algorithm released as of today on June 5, 2017.  If we were to compare the forecast back in June 7, 2015, we can see both forecasts rate First Solar as a buy.  If the previous forecast on June 2015 accurately predicted the stock would increase and it did by over 30%, the latest forecast below could indicate another high rate of return.

The predictability increases in the long term, indicating that First Solar is a strong investment in the long term.

This forecast was sent to I Know First subscribers on June 5, 2017.

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go. (positive = to go up = Long, negative = to drop = Short position). The signal strength relates to the magnitude of the expected return. We use the signal strength for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. It allows the user to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.