Needham: First Solar No Longer A Buy, Weaker Margins Are Coming

• First Solar, Inc. FSLR shares have been heading north over the last three months, and are up 23 percent since September 10.
• Needham’s Edwin Mok downgraded the rating on the company from Buy to Hold.
• Mok cited the concern areas as risks to the company’s 2016 earnings, post-ITC uncertainty in 2017 and slowed efficiency roll-out.

Analyst Edwin Mok said that there is risk to First Solar’s EPS guidance for 2016, since almost 50 percent of EPS depends on the sale of the Stateline minority ownership. The 2016 revenue and EPS guidance of $3.9-$4.1B and $4.00-$4.50 includes a gain of about $200MM, or $1.96 per share, from the expected sale of the Stateline project and FSLR's share of 8point3 earnings.

There are risks to this gain if 8point3 is unable to raise capital to buy, First Solar is unable to find a third party buyer or the potential buyer negotiates a lower price, which translates to a lower profits from this project, Mok elaborated.

The company has guided to GM of 16-18 percent, which is significantly below the 2015 range of 24-25 percent. The weaker GM reflects an unfavorable mix of higher EPC sales, shortened time to COD for some projects, resulting in lower margins, and no revenue or GM from Stateline.

“Unfortunately, mix of EPC-based contracts will increase as international ramps up, and project pricing will likely step down post ITC,” the Needham report stated, adding that GM could decline further in 2017 to 15.8 percent.

Management indicated that volume demand post-ITC would continue to be robust, albeit with a y/y decline. Mok pointed out, however, that with the US likely to decelerate, “mix should shift to more 3rd party module and/or EPC-based contracts.”

The analyst expects revenue to decline 11.4 percent to $3.50B in 2017, and the EPS estimate has been reduced from $4.35 to $1.74.

“We are disappointed by the 2016 efficiency guidance of 16.2%, below 3Q15 lead-line efficiency of 16.4%. Mgmt slows new technology rollout to maintain high utilization, but it appears some markets will not be able to use the higher efficiency modules with anti-reflective coating,” Mok wrote.