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Sell-Side Debates First Solar's Costs, Gross Margins

Sell-Side Debates First Solar's Costs, Gross Margins

First Solar, Inc. (NASDAQ: FSLR) announced initial 2019 guidance after the market close Tuesday. 

The Analysts

Raymond James analyst Pavel Molchanov maintained a Market Perform rating on First Solar. 

Credit Suisse analyst Michael Weinstein reiterated a Neutral rating and $53 price target.

Raymond James: It's Futile Competing With Chinese On Cost

First Solar's initial 2019 guidance has engendered two structural concerns: a lack of significant leverage to the non-utility photovoltaic growth curve and an unclear long-term opportunity for the film's economics and market share relative to crystalline PV, Raymond James analyst Molchanov said in a Wednesday note. 

Notwithstanding the decline in the global benchmark price of crystalline modules from 31 cents/watt to 22 cents/watt — a result of the epic second-half price collapse in reaction to China's feed-in tariff changes — First Solar management reiterated its product margin target of 20 percent, the analyst said.

The target lacks credibility on a sustained basis, especially as there are bound to be further price declines in 2019, Molchanov said. 

First Solar's strategy of taking on cut-price Chinese competitors is not viable, he said. 

The revenue guidance of $3.25 billion to $3.45 billion issued Tuesday is above Raymond James' estimate, the analyst said. The share of Series 6 modules is expected to reach two-thirds of the total volume, which would mean a year-over-year doubling of volume.

The gross margin guidance of 20-21 percent is 200 basis points below Raymond James' estimates, although it allows leeway for potential EPS upside, Molchanov said. 

Raymond James lowered its 2019 EPS guidance from $2.75 to $2.62, which is toward the high end of First Solar's guidance of $2.25-$2.75.

Raymond James expects a modest increase in profitability in 2020 as lower ramp and startup costs offset pricing pressure.

Credit Suisse: Safe Harbor Opportunity Offsets Startup Costs, Lower Gross Margins

Series 6 cost is in line with expectations, while a safe harbor opportunity offsets higher-than-expected start-up expenses and lower system gross margin percentages, Credit Suisse's Weinstein said in a note. 

The analyst sees the safe harbor disclosure clarity, better-than-expected gross margin and production as well as lower-than-expected adjusted operating expenditure as positives.

Higher-than-expected start up expenses, a lack of clarity on Series 6 cost structure, lower-than-expected system gross margins and lower-than-expected production in 2020 could weigh down First Solar Weinstein said. 

Credit Suisse lowered its 2018 EPS estimate from $1.57 to $1.50, pushing forward the 40 MWac India project sale from the fourth quarter of 2018 to 2019. The firm raised its EPS estimates for 2019 and 2020.

The Price Action

First Solar shares were trading up 1.48 percent to $43.08 at the time of publication Wednesday. 

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Latest Ratings for FSLR

Apr 2019ReiteratesBuy
Apr 2019ReiteratesBuy
Jan 2019Initiates Coverage OnOverweight

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