Axiom Discusses Bull Case On First Solar (FSLR)

Axiom Capital Management is out with a research report on First Solar

. It has a price objective of $62.36. In a note to clients, Axiom writes, "While we believe it is becoming increasingly clear to the market that module pricing is under pressure, our recent discussions w/ investors lead us to believe that it is a bit less clear that thin-film module vendors are having a harder time selling than silicon module vendors because they are disproportionately reliant on the ground-mount market (which has virtually disappeared in Germany, France & Italy); in our attempt to better understand the viewpoint of the smarter FSLR bulls, & the rationale behind why the aforementioned factors haven't changed their fundamental view, &, more importantly, why they are convinced FSLR will earn $9.44/$10.87 in ‘11/'12, we proactively reached out to a number of FSLR “longs”; the answer we got, interestingly, centers around the idea that the FSLR bears don't understand how profitable the “captive pipeline” is, particularly the utility deals which had PPA's priced in '07-'08, when energy prices were at their peak; the thought is that any shortfall on the 80% of '11 module volume FSLR guided to be sold into the merchant market will be made up by higher profits from the 20% of modules FSLR has guided to be sold into the captive market; in what follows, we attempt to show, clearly, why this is impossible mathematically: Given FSLR has guided total shipments in CY11 to 2GW, with 400MW of these shipments coming from captive pipeline projects, it is fairly easy to quantify what it costs the company when module prices fall – we remind our readers that FSLR guided its CY11 module ASP to $1.43/watt (i.e., $2.85B in component sales ÷ 2GW of component shipments = $1.43/watt). That is, for the 1.6GW (i.e., 2GW – 400MW captive pipeline) FSLR needs to sell into the merchant market, each $0.10/watt FSLR's actual CY11 ASP falls below its guided ASP of $1.43/watt, there is an operating loss of $160M (i.e., 1.6GW × $0.10/watt = $160M). Thus, using FSLR's 13% tax rate, it is clear to see that each $0.10/watt of CY11 ASP downside vs. guidance equates to $139.2M in earnings lost, or $1.60 in EPS (using 86.8M shares outstanding) – we remind our readers that FSLR guided CY11 EPS to $9.25-$9.75, or $9.50 at the mid-point (Street is currently at $9.44 vs. our $4.16). When considering we see at least $0.20/watt of downside to FSLR's CY11 module price guidance of $1.43/watt (which would imply silicon module prices at $1.43/watt for the year vs. prices at ~$1.50/watt today [a very conservative assumption, in our view], using a $0.20/watt balance-of-systems penalty to reflect FSLR's less efficient modules), we see $3.20/share in EPS downside (before adjusting for volume shortfalls/underutilization) to the company's $9.50 earnings guidance."