First Solar: Strong Buy Despite the Weakness

Shares of First Solar, Inc. (FSLR) have slipped this year despite strong results. What's going on?

The drop in share price has come despite the company delivering strong financial numbers for the quarter. First-Solar posted better-than-expected earnings of $1.66 per share, topping the fourth-quarter earnings of $1.60 per share and the consensus estimates of just $0.93 per share.

The most important thing to notice here is that this strong growth in its earnings was despite its top line falling by 10% for the quarter.

The boost in the bottom line can be attributed to its effort of improving its gross margin that rose by 6.4 percentage points sequentially and by 22.7 percentage points on a year-over-year basis.

Apart from reducing system costs, First Solar is also lowering its operating expenses.
First Solar: Strong Buy Despite the Weakness
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For instance, its operating expenses for the last reported quarter came in at 97.6 million, a slump of 11 percent from operating expenses of $109 million for the first-quarter of 2015. In fact, the company managed to decrease its operating costs by almost $2 million sequentially.

In my opinion, these cost reductions along with rising efficiencies should allow the company to improve its financial performance in 2016. Already there has been significant improvement in the module gross margin percentage, enabling the company to increase its margin potential to the tune of $1.3 billion to $1.6 billion through 2020.

Another growth driver

First Solar should be pleased with the start up of 8Point3 Energy Partners LP (CAFD). This is a joint YieldCo with SunPower Corporation (SPWR).

The YieldCo will decrease its capital costs while increasing return on the projects, particularly in high quality assets. This will increase its cash flows in the future. In fact, the creation of 8points3 Energy partners will enable the company to compete better against its peers for its future projects.

As of now, First Solar contributed four projects to this Yieldco, in return of 31% ownership interest in 8point3. It also received $284 million in cash with the IPO of 8points3energy. This has boosted its cash and marketable securities by over $291 million to $1.8 billion. Its net cash position now stands at $1.5 billion, an increase from $1.2 billion in the prior quarter.

This is simply outstanding. With an increasing number of projects being dropped down into its YieldCo, First Solar will enjoy low costs of capital that will enhance its financial results remarkably.

Conclusion

First Solar is a good pick for both short and long-term investment. Its forward P/E of 13.3 times is well below of its trailing P/E of 16.7 times. Its balance sheet carries total cash of $1.8 billion, which easily covers its total debt of $316 million. It has operating cash flow of $446 million and free cash flow of $383 million provide plenty of downside protection for shares.
Published on Oct 4, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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