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First Solar, SunPower Should Benefit From Stimulus

Posted on Wednesday, Aug 19th 2009

Pricing pressure, supply–demand mismatch and the credit crunch have raised concerns about the short-term outlook for solar energy equipment makers worldwide. Analysts peg solar panel production at 5.5 gigawatts for the year 2009 compared to capacity of 9.9 gigawatts — a clear indication of capacity idling due to lack of demand.

The US market is looking to install 358.2 megawatts in 2009, down from the 391.3 megawatts of solar panel-based energy systems installed in 2008. Installations are supposed to grow by 428.7 megawatts in 2010. If funding issues had been resolved, there could have been nearly 600.4 megawatts installed in 2009. With the US government trying to ease the credit crunch through tax sops or equivalent Treasury grants, the situation might slowly improve in the second half.

Germany, the world’s largest solar energy market, is also setting its challenges for the industry. The country has been a faithful follower of feed-in tariff programs, which require all solar energy produced to be bought by the utilities at premium, government-set prices. As the cost of production declines as the market grows, these tariffs are supposed to decline as well. Analysts believe that the present tariffs will be subject to further reduction, ahead of the scheduled rate cuts, thus impacting equipment manufacturers’ revenue figures. This is cause for concern to some of the key players in the industry.

First Solar (NASDAQ:FSLR), the leader in the segment, saw Q2 revenues of $525.9 million grow 97% over the year and beat analyst estimates of $459.1 million. EPS of $2.11 also jumped from the previous year’s $0.85 and shattered the market’s expected $1.62.

Revenue growth was driven by increased volumes and lower costs. During the quarter, First Solar was able to bring manufacturing costs down by 6.5% to $0.87 per watt due to the lower material costs and by operating out of Malaysia.

Their production grew 32% over the quarter to 290 megawatts with most of their Malaysia plant[s?] operating at full production for the quarter. Efficiency of 10.9% grew slightly over the previous quarter. First Solar’s annualized capacity per line grew 5% over the quarter to 51.7 megawatts. Besides the US, they are looking at growing in Germany, France and Canada.

Of late, the German market has seen “aggressive pricing behavior on the part of some manufacturers”. To counter this, First Solar initiated a rebate program with which their product prices will be benchmarked on best-in-class crystalline silicon module prices for the quarter. The rebate is expected to amount to $40 million to $60 million through the year.

First Solar also sees good opportunities in France and Ontario, Canada, where feed-in-tariff programs are already running. The French government has made an explicit commitment to 23% renewable energy levels and First Solar is looking at a 5.4 gigawatt target in that market.

Despite the company’s stellar performance, they retained their guidance for the year at $1.9 billion to $2.0 billion sales with GAAP operating margin of 31% to 33% for the year.

The stock is trading at an attractive buying price of $134.43 with a market capitalization of $11.4 billion.


First Solar has enjoyed a pricing advantage owing to its relatively low-cost technology based on cadmium and telluride instead of polysilicon. However, as polysilicon prices have fallen nearly 50% owing to increased supply, reduced demand, and the harsh European winter, which delayed installations, FirstSolar will likely soon lose its edge on pricing, and SunPower and other Chinese manufacturers could easily gain market share.

SunPower’s (NASDAQ:SWPRA) Q2 revenues of $298 million grew 40% sequentially and slipped 22% over the year. They managed to turn a profitable quarter after having suffered a loss of $0.06 a quarter ago. EPS of $0.26 was 24% lower than the previous year’s earnings.

Components revenue of $189 million grew 75% sequentially and 68% over the year. Growth was driven by the North American and German markets. Systems segment revenues contributed $109 million to the quarter.

SunPower maintained their leadership position in California in both the residential and non-residential segments. Their overall market share was more than 30% for the region. They have 1.3 gigawatts of projects under development within the US. During the quarter, they installed 25 megawatts aspart of their contract with Florida Power and Light. They are planning an additional installation of 10 megawatts at the Kennedy Space Center by the end of the year.

As they adjust production and inventory levels in response to low demand, SunPower has reduced production at their facilities to under 50% capacity. They also managed to reduce inventory levels by approximately $80 million in the quarter.

The company remains optimistic about future demand and recently launched a new product, T5 Solar Roof Tile, which will integrate the panel with a mounting system and should decrease installation costs and time by doing away with the need to place panels on the racks at job sites.

They are spending on advertising and brand-building campaigns to grow their customer base. SunPower saw 30% growth in the customer leads after their recently launched campaigns in San Francisco and Los Angeles.

Spurred on by the US government’s stimulus package, SunPower found $100 million in funding from Wells Fargo for projects catering to businesses, universities or government agencies in the US. As part of the deal, Wells Fargo will own the systems, SunPower will design, build and operate them and end customers will sign long-term power purchase agreements (PPAs) with SunPower to pay for using solar electricity. They are already carrying out two such projects of nearly 1 megawatt capacity each under this funding. The investment would entitle Wells Fargo to a 30% tax credit, or an equivalent grant from the U.S. Treasury.

SunPower marginally increased the outlook for the year to revenues of $1.35 billion to $1.75 billion with non-GAAP EPS of $1.15 to $1.60.

They are aiming to produce panels at a cost of less than $2 per watt. Analysts expect pressure to mount with module ASP costs from Chinese companies expected to drop to $1.80/watt this year and a further 25-30% in 2010. SunPower’s target is for costs to fall to less than $1 per watt by the end of 2014. Though costs are still very high compared to First Solar’s, SunPower is not a competitor to be dismissed.

Their solar cells currently work at 22.5% efficiency, and the company is working on improving this efficiency to 25% by the end of 2014.

The stock is continuing to trade at rather low levels of $26.57, taking its market capitalization to $2.57 billion.


Earlier this year, the Obama administration passed the $787 billion economic stimulus package of which the renewable energy infrastructure was a key component. The package included $38 billion in government spending and $20 billion in tax incentives over the next ten years. The intention is clear — to promote the development of renewable energy sources and increase energy efficiency in all sectors.

Many renewable energy projects had been delayed or abandoned due to lack of financing. Previously, if an investor’s income was not big enough, he could not fully claim the 30% federal tax credit. The bill now allows project developers to get the same credit by instead applying for a loan from the Department of Energy for 30% of the project. The loan guarantees are aimed at helping companies commercialize new energy technologies and thus reduce costs to the end consumer. To boost demand, the package includes $5 billion in funding to weatherize homes for up to one million low-income households.

Many believe this is the first step to a real federal-level energy policy, one that clearly incentivizes the development of alternate energy sources. As the stimulus money takes effect, the demand softness plaguing the industry should soon pick up. Further, with prices starting to bottom, these stocks are poised to rise.

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