First Solar (FSLR)

The stock (at $210 on Feb 22) reflects a multiple of 151 on current earnings and over 20 times 2010 expectations. This is assuming estimates are accurate and there is a lot of room for the company to miss. The stock appears priced to perfection and it would take little in the way of disappointment to set off a sharp decline.

Analysts appear to have nothing negative to say about the company - but pay little attention to the high multiple. This has likely led to an investor base full of high momentum traders which leaves the stock vulnerable should the trend weaken and these traders move on to other stocks.

As the oil price has shown us, even moderate increases in demand for a commodity with inelastic supply can create massive price rises.

The market is beginning to work with decreasing prices for finished products. As these sales prices drop, the company is becoming more efficient in production - but not quickly enough. The end result is lower margins which could cause concern in 2008 when analysts begin to crunch the numbers.

An aging utility infrastructure and high demand is leading to the Germany government pulling back support for the solar industry. In 2010 Germany had the largest solar installation market at 8 GWp of the total global market of 18 GWp.^[1]

Installations have risen so much that officials have been quoted as saying, "The Economy Ministry wants to have solar power production switched off when the grid is overloaded on sunny days." To go along with this they are looking to extend deeper cuts into the country's feed in tariffs (FIT). The Environment Ministry has already announced that it will implement cuts of up to 15%, six months earlier then originally stated. The new cuts will begin in July 2011 and the Ministry is pushing for additional cuts as high as 25%.^[2]

With the world's leading solar market pulling back support this could lead to a slowdown of the industry as a whole. With solar companies struggling to survive on their own, the continued drop in support will slowdown such a fledgling industry. Many countries are not able to handle solar power because of aging infrastructure and other competing forms of energy. Their response seems to be to slow solar energy growth rather than to adapt. At least in one major market we may begin to see growth declining in the new future.

THE COMPETITIVE ADVANTAGE OF FSLR AS A LOW COST PRODUCER IS FINISHED LETS SEE NEXT OCT 30 TH REPORT.

FSLR's technology makes solar cells out of cadmium telluride. While there aren't any problems with cadmium supplies, tellurium is a very scarce element found mostly in copper ores. First Solar already uses a large fraction of the world's tellurium production, leaving relatively little room to grow. Furthermore, tellurium production cannot be readily expanded, since it is almost exclusively produced as a byproduct of copper production. Unless there is a huge expansion in copper mining, there will be a ceiling on First Solar's production. First Solar could probably keep growing for another couple years before it runs into major problems, but the company's long-term growth will be limited.

Some people believe there may be safety issues with CdTe thin film PV modules. Both Cadmium and Tellurium are toxic substances that are known to cause considerable harm to people. Any release of either into the environment, despite safety measures taken by the company, may lead to extensive litigation. Thus, FSLR is restricted to the utility market - it would be unwise to expand into residential markets where house fires would release chemicals.

The failure of the US Congress to extend tax incentives for solar or to pass a renewable electricity standard, demand for solar panels may not continue to grow as robustly as it has in recent years. If anything, this should cause prices per watt to fall somewhat in 2008.

The failure of the US Congress to extend tax incentives for solar or to pass a renewable electricity standard, demand for solar panels may not continue to grow as robustly as it has in recent years. If anything, this should cause prices per watt to fall somewhat in 2008.

The technology using CdTe is hardly proprietary technology to the company. Manufacturing CdTe thin-film PV by existing (or potential entrant) PV manufacturers is much easier. Currently market size of thin film solar PV is only 8.3% of the total PV market. As this market size grows, its question of when rather than whether there will flood of entrants in this market. These high P/E multiples doesn’t support this strategic analysis in long term.

Most of the company's revenue comes from Germany. This is because the country uses heavy subsidies to stimulate demand. Management has yet to prove that they can sell their products in free market economies which will be crucial for long-term profitability.

First Solar's valuation (at $267) seems out of line because of an inherent limitation on their profitability.

Their solar panels are based on Cadmium-Telluride (CdTe) thin film technology, and Tellurium (Te) is one of the scarcest elements in the Earth's crust. In 2006, First Solar's 60MW of production consumed 4% of the world's annual supply of the metal.

In 2008, analysts expect revenues of approximately 4x the 2006 number, meaning they will need approximately 16% of new annual Tellurium supplies. PrimeStar Solar, a private company is using a recent infusion of capital from General Electric to quickly begin production of their own CdTe modules. They do not disclose the timing of production "for competitive reasons," but their hiring and equipment orders speak of an aggressive schedule; production expected to begin this year.

With this much demand on short-term Tellurium supplies, we can expect continued price increases. First Solar cannot set the price of their product in the market, because they will be in direct competition with conventional solar modules as will as thin film modules based on CIGS and amorphous silicon technologies.

If First Solar produces 240MW of panels in 2008, and Te prices remain at $100/lb, as they were in 2006, Tellurium cost alone would be $87 million, compared to First Call average estimated Revenues of $800M, and $146M estimated earnings. I don't know what Tellurium prices were used in those estimated earnings, although expected to be over $100/lb. Whatever those estimates were, a $200/lb underestimate would completely wipe out earnings for 2008.

NOTE: The best data we can conclude is that FSLR uses 6g of Te per 60 Watt panel. @240 MW that is 4M panels * 6g = 24Mg / 454g/lb = 52,800 lbs of Te .. @ $100/lb that's just $5.3 million dollars. @480MW (2008 production) it's about $11M. You can expect Te to be at least $200/lb - $22M. FSLR surely has contract agreements however that will cover them for a solid period of time---- at least on SOME of their supply.

HOWEVER, the SUPPLY OF Te is the BIGGER concern. If you read Google Posts, you'll see a several page article I wrote on the constraints of Te that proves that FSLR is using between 20-25% of the world supply of Te. With GE entering vigorously - -you can expect not only Te to rise, but supply constraints to get worse.

The failure of ratification by the US Congress to extend tax incentives for solar or to pass a renewable electricity standard; the demand for solar panels may not continue to grow as robustly as it has in recent years. If anything, this should cause prices per watt to fall somewhat in 2008.