Profile: First Solar Inc. is a photovoltaic module designer, developer, manufacturer, and seller based in Tempe, Arizona. The company, founded in 1999, produces cadmium telluride thin-film PV modules that produce clean and reliable solar energy. The company sells its products to distributors, wholesalers, power plant developers, and PV system 
integrators. The company has partners/subsidiaries throughout Asia, Europe, and North America with the majority of the company’s business coming through the United States, Germany, France, China, and other countries.
Thesis
Solar energy continues to be a tough industry to predict with continuous changes in the energy picture, different nations offering subsidies, taking them away, shifting costs and demand, etc. The market is heavily crowded with many companies offering mostly similar silicon photovoltaic modules, but there is one company that has established itself as the cheapest and most efficient solar company. The company is so efficient that they have created a custom assembly of their PV cells and do not let anyone see them during production.
First Solar Inc. (FSLR) has established as a definite leader in the industry not only through its ability to create the most inexpensive PV cell but also through its abandonment of silicon as its source of PV cells and use of cadmium telluride instead as the base material. The company can produce a PV module for only 76 cents a watt, which is the cheapest in the industry. The key in solar energy since it is a commodity is cost structure. In this field, FSLR is king. The company would like to reduce their PV production to 52 cents per watt in the next five years, which is very attractive especially given the current situation in solar.
Solar energy now is facing the fact that the industry will be receiving feed-in tariff cuts (FIT) from the largest markets it operates
in (Germany, Spain, Italy, and France). Additionally, the supply of PV cells continues to grow as more and more companies come to the playing table and larger established corporations are beginning to eye the industry (GE, ExxonMobil). Therefore, cost structure remains key to being able to compete in this industry. Additionally, with tariffs coming down and the Euro maintaining weakness, a diversification to new markets is crucial.
First Solar has made great strides to expand its business into the USA and China, which is a great sign that the company will be able to maintain its high rate of growth that it currently maintains. Its operating income growth has slowed down but appears to be on track for another 12-15% growth in 2010. The company is looking to build 500 – 700 MW of projects throughout North America in 2011, which is up 175 MW from 2010. This is by far the most projects in the States, and the company continues to grow here and in China. California may become the next largest market of solar panels vis the California Solar Initiative, and First Solar is very well positioned to benefit from this considering they are an American company and have been able to develop a robust line of utility companies that can handle large-scale utility projects that appeal to governments and large companies.
One of the companies most recent acquisitions of NextLight Renewable Power LLC shows the company’s ability to vertically integrate as it has no need to outsource large utility projects to a company that specializes in putting together solar factories. This integration will help to increase First Solar’s margins, which are at 48.85% TTM. The need to integrate and reduce costs 
is all part of the company’s leader CEO Michael Ahern’s plan to maintain an extremely tight cost structure.
The company looks extremely strong financially as well. The company, in the past two years, has been able to start to produce free cash flow, which is such an important factor for any company to be able to turn out significant new projects and reinvest in itself without taking on large debt packages, increasing common shares, or falling behind the competition. Another great financial aspect of FSLR is that the company has been able to maintain its accounts receivable and inventory close to its sales. In the solar industry, companies are basically maxxed out all the time and have dedicated all their MW for one year before the year begins. A bad sign is when a company starts to see its accounts receivable (A/R) build up faster than sales. Over the past two years, the company has seen 264% growth in A/R and 247% in revenue. Inventory increased 296% versus 246% over the past two years. The company, though, says they are maxxed out through next year. That was seen in their last quarter when the company saw 31% growth in revenue but only 20% growth in inventory. All these financial aspects are signs of a healthy company.
One of the main issues for First Solar is that they face stiff competition in the solar energy market. There are over 35 public solar energy companies on the NYSE that are competition with FSLR. Most of these companies are small and do not compete on the same level. First Solar, though, among all companies has probably created its biggest economic moat. They have the cheapest production capabilities, and they are the only company that primarily uses cadmium telluride rather than silicon for
production. The company’s tight cost structure is allowing it be a leader in a commodities-based business.
Another issue is that cadmium telluride is less efficient than other PV cells. The companies modules only have about 11% efficiency per cell while the sector average is around 17%. This causes the company to have to install more panels for the same energy as another company. At the same time, they have such a cheaper cell that they are able to use that to their advantage. The company is price sensitive though because if silicon prices decline, companies like Trina, Suntech, and Yingli Green are able to undercut their prices as their margins improve. First Solar still has an upper hand, but these companies continue to nip at their heels. Eventually, FSLR will not be able to maintain such high margins, but they have obtained such a strong reputation that they will continue to be a leader.
Some investors believe that FIT cuts from European nations will plague these nations, but where one nation cuts tariffs another is starting to open up to the industry. This diversification is allowing for solar companies to battle European cuts. Germany, France, Italy, and Spain are all planning cuts, but for the most part, these cuts are generally priced into the stocks. The movement into the USA and China, which FSLR is doing at high rates will help the company to neutralize higher costs in Europe
Further, the outlook for solar is not at all cloudy or a bad one despite the Euro woes and Germany’s subsidy cuts. According to Credit Suisse, the global demand for solar energy should rise from 10 gigawatts to 12.7 gigawatts on the year as economies start to recover and the price of oil remains high. The rise in demand of solar continues to increase each year. In 2008, the demand was just 6 GW and was just 1.7 GW in 2006. Growth in France and Italy is supposed to be 50% higher this year than last, according to UBS. Even Germany, who has been installing cells for years, is expected to see another 15% in growth in 2011.
The company continues to operate one of the soundest businesses in the country not only its sector. First Solar has maintained gross margins above 40% since 2006. The company has improved their return on equity from 2004 – 2009, going from -74.07% to over 30% last year. The company also is becoming more and more financially healthy. They have reduced long-term debt as part of liabilities from 32% in 2004 to 3% in the latest quarter.
Overall, First Solar is a strong company that will continue to grow into its future. Risks do remain for the company, but they areone of the only solar companies to have built itself even the slightest economic moat.
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Valuation
The Oxen Group’s fair value estimate for First Solar is $174 per share based on a discounted cash-flow analysis. The company has seen incredible growth in its operating income in the past five years, and there is really no worry that the industry cannot continue to grow as demand continues to grow. Given the development of new markets, the company’s ability to offer the cheapest product and continued growth of capacity of MW the company can produce per year, the company is continuing to offer growth in its income. The company should see 10-12% in operating income over the next five years each year, which is actually quite low in growth compared to estimates about the growth capabilities of the industry. Estimated available cash flow starts at $133 million for this year, increasing to $792 by 2015. The company has a WACC at 8.3%.
We have a Buy rating beginning at $130.
Risk
Risk is medium with First Solar. The company, in the last five years, has been able to definitely develop itself as a leader, but it is in a commodities industry. If another company can find a way to beat out First for production prices and undercut its price and margin upper hand, then FSLR will have issues. Questions about the Euro and subsidies remain in the short-term, but they could create long-term issues for solar companies if they fall out of favor due to rising prices. Upturn in the global economy would do wonders for solar energy, and the USA and China’s interest are definite positives.
Management & Stewardship
Chairman Michael Ahern served as CEO from 2000 – 2009 and still is the company’s chief executive. Ahearn has built a solid company that has done wonderful things in the past ten years. He is the key to the company’s low-cost of production. In 2009, the company brought on a new CEO to take part in the next step of transformation. The new CEO is Robert Gillette, who was the former CEO for Honeywell Aerospace. He also worked in an executive role with GE before coming to Honeywell. Gillette
Overview
Growth: The company has averaged 1225% increases in its operating income in the past five years. These results were skewed by 4467% increase in 2007, but the company still saw 55% growth in operating income in 2009. The company should continue to offer above 10% growth for years to come.
Profitability: The company should continue to maintain its operating margins above the 40% range, which is very high. The company will remain profitable, but the Euro and subsidy cuts do cause some problems. The company, however, will most likely battle this in the short-term with higher prices.
Financial Health: The company is in very solid financial condition. The company has decreased its current liabilities over the past five years and has a solid current ratio. The company does have some long-term debt, but this is definitely expected in a high technological institution that operates large factories with expensive equipment and design. That number has decreased as a ratio to liabilities each year.
