Is Multiple Compression a Given for First Solar?

by StockJockey

Tuesday, August 19, 2008 - 9:47 pm

ThinkPanmure must not have gotten the memo on First Solar (FSLR-NASDAQ).

Writing positive puff pieces every day on your blog will bring you tons of visitors and glowing comments from the unwashed masses. Unfortunately for First Solar bulls, Michael Moe & Co. publish fairly objective research, and while they might not be Sanford Bernstein, in the small cap growth world they are about as good as it gets.

But ThinkPanumure is beginning to fidget over First Solar’s recent contract wins, or lack thereof. Sunpower (SPWR-NASDAQ) is stealing their thunder, and pesky new entrants lurk under every panel, and rock.

Bulls will brush off the concerns, but stay tuned. Does First Solar have a mega utility contract in hand? Or are they heading for the solar D-List?

They still have a “Buy” on the stock, and a $350 price target.

The stock had Monday and Tuesday to trade on this news, as the research note came out before Monday’s open, for what it is worth.

Recent multi-hundred MW solar PV utility projects suggest that (1) high efficiency c-Si systems from SunPower are cost competitive; and, (2) competition in the thin-film landscape is heating up. We wonder if it is only a matter of time before First Solar announces a mega U.S. utility contract, or if there is a fundamental underlying reason for the company’s absence from the recent spate of contract wins. Whatever the reason, we think investors may interpret an extended missing in action (MIA) status on this front as a reason to assign a lower multiple to FSLR shares.

KEY POINTS:

SunPower Corporation Establishing Utility Footprint in the United States

Despite the apparent high-cost disadvantage associated with its more complicated back-contact high-efficiency cell technology, SunPower is winning significant large U.S. utility-class power plant projects on a levelized cost of energy (LCOE) basis, and appears to be establishing a leadership position in the space. We note that the recent 250MW PG&E project is contingent on PTC extension, and while this is clearly a positive win for SunPower, we are not changing our financial forecast for SunPower at this time given the project’s contingency on future legislation.

“New Kid On the Block” Thinfilm Solar PV OEM/IPP OptiSolar Appears from Relative Obscurity

We were surprised that the thin-film “a-Si” part of the PG&E contract (550MW of the 800MW total) will be supplied by OptiSolar Inc. (OptiSolar), a little known California-based power producer—FirstSolar’s silence is somewhat deafening. We note that PG&E has chosen OptiSolar despite compliance risks associated with OptiSolar being a privately-held company with apparently little funding and no track record of thin-film production at large scale.

Whatever SunPower’s and OptiSolar’s economics, one thing is clear, they are establishing a footprint in the multi-hundred MW U.S. utility arena with this high-profile PG&E win. Whereas First Solar has been operating in relative un-contested isolation as the only large-quantity producing thin film solar PV producer since its IPO, it appears that there is emerging a new breed of solar PV thin film competitor. Accordingly, we ask what First Solar will do with all of its production capacity once its long-term contracts are fulfilled?

Implications for First Solar

While some might think that First Solar is (1) just late—e.g., does not yet have its eye on the U.S. opportunity; (2) business-model challenged—we note that the two winners for the PG&E contract are going to supply through IPP subsidiaries; and (3) afraid of what might happen to its multiple if it becomes a utility-like power generator, we think First Solar’s absence may be a combination of the above. Meanwhile, unless First Solar can set the record straight with a similar multi-hundred MW contract announcement, we would not be surprised if investors interpret First Solar’s absence as a negative and assign a lower multiple.
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