Disciplined Approach and Focused on Delivering Long-Term Value to Shareholders
Jan 31, 2020 by InvestorDestination Team
Recently an investment firm has lowered its target price for First Solar, Inc (NASDAQ: FSLR) citing the decline in First Solar’s project business. As a result, the stock declined and hit our entry point.
After 2011 oversupply challenges, many solar players became vertically integrated, including First Solar. As competition increased for project business and PPA price declined, many solar players have abandoned vertical integration and focusing on their niche. For example, Sunpower abandoned its utility project business and concentrating on commercial and residential segments. A few years ago, First Solar also mentioned that it would lower its exposure to project business, and that business will account for only one-fifth of its module capacity that is approximately 1GW. So the decline in First Solar's project business is intentional.
Investors are concerned about the company's ability to meet its current year guidance. Apart from that, in general, First Solar provides the upcoming year guidance in December, but not this year. Due to short-term uncertainties regarding its project sales and converting one of its manufacturing facilities from series 4 to series 6, the company has postponed guiding until Feb 2020.
One of First Solar's projects in Japan may be delayed due to a recent typhoon in that region. Due to the company's funding structure, delay in this project might delay the sale of two more projects in Japan. If that happens, the company's 2019 EPS will be $0.5 lower than its current estimate, and revenue will be lower too. However, the company will recognize revenue and earnings next year.
Even if that Japan project gets delayed, the company can sell the remaining two projects. However, the company will delay the sale of two more projects to optimize the aggregate value of projects. That means the company is not compromising the delivery of long-term value to the shareholder at the cost of meeting the short-term guidance.
Companies do fail to upgrade their manufacturing facilities. That is not the case with First Solar. It has successfully started manufacturing series 6 modules in three of its manufacturing facilities. As mentioned, it is a pure timing issue.
The company has been consistently improving its module efficiency and reducing costs. Its series 6 module cost is 40% lower than its previous model.
The company is not chasing growth at the cost of profitability, instead choosing to grow profitably. As a result, it consistently generates strong cash flow and profit while most of its competitors are struggling to be profitable and generate positive cash flow. It has the best balance sheet in the industry.
In general, solar stocks are volatile. If you can ignore the noise, it is worth considering.
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