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Growth Stocks: First Solar Inc.

下午6:00 2022年8月2日

First Solar, Inc. (FSLR.US) has put an end to a week where its shares rose more than 35% to currently trade at an eight-month high. From a strong second earnings report with an increase in full-year sales guidance, the biggest advance was reports of a new climate and clean energy bill gaining traction in Congress. The "Inflation Reduction Act of 2022" includes more than $369 billion for the next decade in tax credit and direct investments in renewable energy technology such as solar. Indeed, while the bill has yet to become de facto law, the setup here is unexpected potential for First Solar as the largest solar panel manufacturer in the US, getting a boost to its growth outlook.
What's in the new climate law?

Expectations were high in 2021 for the Build Back Better Act, which was touted as a far-reaching "human infrastructure" package encompassing everything from education, health care and climate change. Despite Democrats controlling the Senate, the $2 trillion spending deal ultimately fell through due to concerns about its inflationary impact, particularly from Sen. Joe Manchin (D). In many ways, persistently high inflation trends this year, which hit a 40-year high, ended up vindicating some of that opposition.

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Quick summary: Democrats have introduced a stripped-down version that excludes most of the education and social spending aspects of the (BBB) ​​while focusing on clean energy initiatives to combat climate change, funded through new taxes. Joe Manchin's endorsement gives some confidence that the deal will go ahead.

The package is expected to cut the federal by more than $300 billion over the next decade to help limit inflation by supporting the adoption of renewable energy along with some health care reforms. On the other hand, there is still some criticism that tax increases, including a new minimum 15% corporate tax, would hurt corporate innovation and be bad for the business environment in the US.

source: US Senate


As far as First Solar is concerned, several provisions stand out. Specifically, First Solar would likely receive some of the more than $40 billion earmarked for tax credits for manufacturing facilities and through tax credits for the production of clean energy products that include solar panels along with wind turbines, batteries and electric vehicles. First Solar's CEO commented on this development, noting that they would consider moving more of their capacity to the United States to take advantage of the legislation. From the presentation of results for the second quarter it was possible to extract that:

“While we are still reviewing the full legislative tax release last night, we are hopeful that the Advanced Manufacturing Production Credit, if passed, will help provide the necessary incentives to drive domestic solar manufacturing and ensure our energy independence. nation…"

In light of these latest events and should the Inflation Reduction Act be passed with consistent language on solar-related tax credits, it would be a rapid change in the growth process of the manufacturing sector in USA.

On the demand side, the climate deal also includes consumer tax credits for making homes energy efficient with technologies like rooftop solar. There are also billions in potential grants to states in an effort to accelerate a broader decarbonization of the economy toward the goal of the US cutting emissions 40% by 2030. While it's still too early to tell all the details, the bottom line here is a huge tailwind of operating momentum for First Solar and the solar industry in general fueled by new subsidies.
 
First Solar Key Fundamentals

Coincidentally, the climate deal breakthrough in Congress came the day before First Solar's second-quarter earnings release on July 28. This quarter's finances were generally messy considering several one-time charges.

The company reported adjusted EPS of $0.52 which includes a large after-tax gain of $232 million from the sale of the company's business in Japan. On a consolidated basis, excluding the reported profit, the result is an unadjusted EPS of -$0.40 reflecting significant expenses related to manufacturing site construction and production start-up costs. There was also a $58 million impairment in the operation of its Luz Del Norte power plant in Chile that resulted in a gross loss for the quarter.

The story here was ongoing efforts to divest from its legacy power plant platform business and focus solely on solar manufacturing. With two new facilities under construction between a site in Ohio and another in India, the expectation is for a significant increase in capacity over the next few years. Second-quarter net sales of $621 million were down 2% year-over-year, but also up 69% from the first quarter. Again, there are several moving parts that reflect what is currently a transition period as First Solar prepares for its next stage of growth.

source: First Solar Quarterly Report


More favorably have been the possessions in the reserves and shipments of expected modules. Of the 21.4 GW reported at the end of 2021, the 18.9 GW of year-to-date net new bookings has more than doubled expected total shipments to 44.3 GW. The company also identified a potential 52.5GW of total reserves worldwide and pointed to India as a high-growth opportunity, particularly as its local manufacturing comes online.

source: First Solar Quarterly Report


In terms of its outlook and guidance, First Solar is raising its full-year sales target to a range of $2.55 billion to $2.8 billion, up from the previous median target of $2.5 billion. That said, some of the other numbers were revised down, including its EPS target to between -$0.25 and $0.25, from $0.00 to $0.60 quoted in the first quarter. The volatility of this quarter's guidance is largely based on the uncertainty of how a potential sale of the Chile Luz Del Norte facility will play out.

source: First Solar Quarterly Report

 

So what to expect from First Solar?

FSLR's outlook in its operating and financial context becomes much more interesting in 2023 and 2024. Management expects the completion of its factories in Ohio and India to gradually add around 6 GW of annual manufacturing capacity. For context, the second quarter production level implied a current capacity of 8.8 GW. By this measure, there is a roadmap for sales to almost double in the next few years. The additional volume should be a material positive for the company's margins and scalability.

Compared to 2022 full-year revenue forecast of $2.6 billion in line with company guidance, the market sees a 26% increase in 2023 and again 28% higher in 2024 to reach $4.1 billion . On the earnings side, from an estimated EPS loss of -$1.52 this year, First Solar is expected to return to profitability by 2023 with forecast EPS of $2.32, which has room to double to $4. .61 in 2024. Trends with the reserve provide some visibility that these estimates are achievable.

source: seeking alpha


Going back to the new clean energy law, the catch is that strong US demand could support higher average sales prices. Depending on how quickly the legislation takes effect and the grants are distributed, the optimistic case for action now is that there is room for these estimates to be revised upwards. We may also consider that if market conditions for solar power in the US evolve quickly enough, First Solar could shift some of its overseas shipments to the US to meet demand and capture share.

It is clear that the incentives are positive for the entire solar industry. First Solar's appeal is its profile as a pure player in module/panel supply, which contrasts with other names that focus more on power systems, inverters, energy storage or energy management systems. Specifically, First Solar is likely to be better positioned to take advantage of the tax credits proposed by the most recent legislation. For context, its current US facilities have a combined capacity of about 2.7 GW, compared to just 0.4 GW for China-based JinkoSolar Holding (JKS), which operates a single facility in Jacksonville. , Fla.

First Solar's other strong point is its rock-solid balance sheet, which ended the quarter at $1.8 billion in cash and equivalents versus just $135 million in long-term debt. A weakness in several other solar stocks like Canadian Solar Inc. (CSIQ), Sunrun Inc. (RUN), or SunPower Corp. (SPWR), for example, is their high net debt position.
 
Taken together, FSLR's current valuation with a 12-month P/E of 43x and a 24-month P/E of 22x based on the 2024 consensus is warranted given the growth outlook. While FSLR is not the "cheapest" or most profitable solar stock, its combination of segment leadership and earnings momentum provides some assurance of a premium for the sector.

 

source: First Solar Quarterly Report
 
FSLR Stock Price Technical Analysis and Forecast

For all the challenges the market is facing as it grapples with macroeconomic growth uncertainties, record inflation and rising interest rates; the solar industry is a point of light in the coming darkness. The revival of the climate deal represents a game changer in terms of driving growth on the demand side while producing subsidies for providers like First Solar.

FSLR shares in a long position offer a $125 price target for next year which represents a multiple of 55x over the market-estimated 2023 earnings target and is in line with the most recent relative high from November 2020. 2021. The thesis here is that the company's outlook is stronger than ever and in the coming months, we can expect revisions above consensus estimates as more details of the climate bill are ironed out. The stock should trade higher again as its earnings trend continues.

source: xStation

The caution is that stocks have already made an impressive run higher, up more than 66% from their low for the year. A consolidation of these recent highs around the current $100 should be expected as a psychologically important technical level with renewed volatility in the near term.
 

Risks

The main risk to consider would be an unexpected setback in the clean energy bill that would undermine the positive impact on First Solar's growth prospects. Provisions in the legislation that make tax incentives fully reimbursable are important to maximizing their impact and value to the business. A significant deterioration in the economic environment beyond the current baseline would also open the door to another leg lower in the stock. For the remainder of the year, we expect to hear from management on their view of the deal's impact on bookings, while cash flow trends and operating margin levels will be key points to watch over the coming quarters.

 

Darío García, EFA
XTB Spain

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