ThinkPanmure: First Solar’s Earnings Power “Unstoppable”

First Solar’s 2Q08 results were supported by improved throughput at 48MW per line versus 45.4MW in 1Q coupled with a fast ramp in Malaysia plant I. We are reminded that First Solar has some of the best operators in the industry and their ability to find improvements at the margin is very impressive, in our view. We summarize 2Q08 results and changes to our financial outlook in Exhibit 1. We think it is time to raise the expectations bar, as recent performance suggests that management has been maintaining a “low-bar” outlook.

Strong Outlook For Near- And Medium-Term

Higher ASPs (up nearly 5% Q/Q) at First Solar is in line with the industry, where strong demand is chasing after limited supplies. While First Solar maintains that it does not play in the spot market, ASPs are clearly benefiting from a strong global pricing environment, and it seems that the solar PV “gold-rush” in Spain is having at least an indirect positive effect at First Solar. We expect strong earnings power from First Solar for the near- and medium-term with further improvements in operating efficiencies and a fast capacity buildout in low-cost Malaysia.

Still Expect c-Si To Close The Gap In The Long Term

Longer term, we are inclined to keep our foot closer to the brake than to the accelerator as pertains to the methodology we use to derive our 12-month price target. Recall that our outlook for polysilicon calls for a production ramp that should drive down costs and APSs for higher efficiency c-Si modules and, ultimately, put pressure on First Solar’s lower conversion efficiency product. That said, even when applying a significantly reduced earnings multiple (30x versus 50x), we still arrive at a higher price target because the growth in earnings outweighs the multiple compression.

Does Production-Shipment Delta Suggest Saturation?

We note that shipments were 103.2MW versus production of 114.1MW, which indicates an increase of 10.9MW in finished goods inventory in 2Q, which is the largest such increase, based on our alculations. We wonder if this is a temporary booking/timing issue, or if it is an indication that First Solar has become so successful in production that its customers cannot absorb all of the
product. We also note that the Malaysia 3 and 4 capacity expansion timing is not clear, adding to our uncertainty on this front.

* We believe that business had been pulled in from the third and fourth quarters to both ensure completion before year-end and to beat expected reductions in fee-in-tariffs. Despite that, the company still guided for a second half that appears to meet the whisper 3Q08 revenue estimate of something north of $300 million. The company did not provide explicit 3Q08 guidance, but the manufacturing output provided was enough to infer that 3Q08 revenue will indeed exceed $300 million.

* Our call was that 3Q08 expectations were too high and at risk of disappointing as a result of pull-ins to 2Q08 and in that regard this analyst was wrong. We are raising our estimates for 2008 to $1.17 billion for revenue and $3.54 in EPS from $990 million of revenue and EPS of $3.11, respectively. For 2009, we are raising our estimates to $1.8 billion in revenue and EPS of $5.70 from revenue of $1.5 billion and EPS of $5.21, respectively.

* First Solar makes thin-film solar cells and is arguably the largest of its kind in the world. We believe the company is vulnerable to new thin-film entrants and a potentially large drop in manufacturing costs for traditional solar makers. Despite this, the company continues to execute nicely and we reiterate our HOLD rating on valuation.