The solar industry is extremely competitive and continually evolving as constituents strive to differentiate themselves to better compete within the broader electric power industry. Significant price reductions (per watt), reduced margins, and drastic market share shifts have become commonplace for participants. Profitability can be negatively impacted from government subsidies and sovereign capital that allow firms to operate unprofitably for extended periods of time. Production overcapacity is another major concern and will likely persist for some time. We think the structure of the solar industry is very poor, and First Solar reminded us of this when it reported fourth-quarter results Tuesday.
The leading global provider of photovoltaic (PV) solar energy solutions reported revenue in the fourth quarter that declined nearly $500 million on a sequential basis as projects expected to be completed during 2013 were pushed into this year. The company’s gross margin declined 420 basis points in the quarter, to 24.6%, due to lower average selling prices in module-only sales. Fourth-quarter non-GAAP net income per fully diluted share also dropped to $0.89 from $1.94 on a sequential basis. Both measures were lower than consensus expectations. First Solar guided to first-quarter revenue and earnings per share of $0.50-$0.60, also below consensus forecasts, revealing that there may be more to the fourth-quarter miss than just timing of project completion. Though the firm continues to do a decent job lowering its average cost per watt ($0.63, was $0.70 in 2012) and bookings remain relatively healthy (book to bill > 1.1), the quarter and outlook revealed the volatile, difficult-to-predict, and price-competitive operating environment inherent to solar industry constituents.
Valuentum’s Take
Investors in First Solar accept the idea that the company may miss estimates greatly, resulting in material share price declines. Results will be incredibly lumpy on a quarter-to-quarter basis. The firm is profitable, and its large cash hoard ($1.76 billion) is significantly greater than its long-term debt position of $162.8 million, so default risk is very limited at present. Though management points to its net cash position as a competitive advantage, we disagree. If there is an opportunity to make excess returns, capital will find it. We’re monitoring the solar industry very closely, but we view the participants as largely speculative bets at this juncture, especially given the volatility of underlying fundamentals.