First Solar Q1’16 Results

First Solar (NASDAQ:FSLR) gave another good set of results for Q1’16 with improved operational results and potential bookings. Though the levels of debt have increased, it is far below the levels reached by SunEdison. Investors may be concerned given the recent SunEdison bankruptcy filing, low number of bookings by FSLR during the quarter and a CEO change, but good operational results, a sound balance sheet, product innovations, efficiency improvement and reduction in costs are the few areas where this company has been excelling in. First Solar is bankable and top Tier 1 utility scale installer in USA. The company has delivered competitive LCOE, through its constant improvements in efficiencies and cost. The geographical diversification has also improved over time. The stock is trading at 27% below its 52 week high price. I would rate it as a buy.

Improved Operational Results

Due to improvement in efficiencies and reduction in cost, gross margin for Q1’16 improved to 31% compared to 24.6% in the fourth quarter. Operating profits also improved to 165 million compared to an operating profit of 132 million in the prior quarter. Q1’16 EPS stood as $1.66 per share, when compared to $1.60 in the prior quarter.

“Our first quarter results represent a very strong start to 2016,” said Jim Hughes, CEO of First Solar. “The sale of additional economic interests in our Stateline project further strengthens our relationship with a strategic business partner, and the transaction provides greater flexibility for future dropdowns to 8point3. We continue to operate our business with a disciplined approach and are focused on achieving our 2016 objectives communicated at our recent Analyst Day.”

Source: First Solar

Production increased by 43% when compared to Q1’15 due to improved efficiencies and capacity expansion. Average module conversion efficiency in Q1 was 16.2%, which was an increase of 10 basis points when compared to the previous quarter. The efficiency levels are further expected to increase to 16.7% by the end of the year.

Potential Booking & Market

India has become a big market for First Solar with now over 1GW of modules sold in the India. Indian climate is suitable for FSLR’s thin film modules. Potential booking opportunities stands at 23GW, which increased by 3GW when compared to the last quarter and over 600MW was booked YTD 2016. The company has continued in its endeavour to diversify to different markets. Middle East, India and Asia Pacific regions saw an increase in bookings.

Debt & Cash levels

• Total debt increased by 10 million from the prior quarter to 299 million
• Cash flow from operation was 50 million slightly lower as compared to Q4
• Free cash flow was 30 million compared to 20 million in Q4
• Capital expenditures were 52 million as compared to 27 million in the prior quarter.

2016 Guidance

The company has made improvements to its 2016 guidance as well. Gross margin for the whole year is revised upwards to 18-19% from 17-18% announced earlier. 2016 EPS guidance range also upgraded to $4.10-4.50.

Yieldco Scenario

More clarity into dropping down assets to yieldco 8Point3 (NYSE:CAFD) was seen this quarter. First Solar owns 34% interest in the Desert Stateline project, which is the potential dropdown to its yieldco this year, alongwith other projects Kingbird, Moapa and Stateline.

Stock Performance

Though the stock performance has not been very impressive as FSLR lost more than 16% YTD, FSLR is currently trading at ~27% below its 52 week high price of $75 reached in March. The market capitalization stands at $5.59 billion, with P/E of more than 7x.

Conclusion

Solar industry is poised to grow majorly because of its green credentials and declining costs. First Solar has been a stellar performer and has delivered improved technology innovations and improved efficiency levels while attaining major reduction in costs. The company has remarkably reduced its costs to as low as 40 cents per watt and claims to attain 25 cents per watt levels by 2019. Surely First Solar’s investments in technology has paid off, as the efficiency levels have improved immensely. It is one of the major solar players in the industry today and is poised to benefit from the secular growth of the industry in the future.