First Solar Faces a Freeze

Each quarter, we bask in First Solar's (Nasdaq: FSLR  ) results. The company is remarkably consistent in the execution of its quest for thin-film domination. Suntech Power (NYSE: STP  ) and Energy Conversions Devices (Nasdaq: ENER  ) are respectable competitors in the space, but First Solar remains king.

Its fourth quarter was pretty much business as usual. Revenue and operating income more than doubled the prior year's results. Most noteworthy was the firm's milestone sub-$1 per watt manufacturing cost, down from $1.08 last quarter. The next target in First Solar's sights: $0.65 to $0.70/watt by 2012.

The long-term outlook for this firm continues to look pretty fantastic. So why the share-price plunge yesterday?

On the conference call, First Solar contrasted its sunny mid-to-long-term outlook with the short term, which "has never looked more difficult." Given this industry's fits and starts over the past few decades, that's a serious statement.

First Solar pointed to pretty much the same culprits we've identified in our ongoing coverage of this convulsion: demand stifled by inadequate access to credit and project financing, and module oversupply. The company is somewhat protected by its differentiated product, which is less commoditized than traditional PV. But First Solar is still feeling the heat, and is taking the following three steps:

• Reducing pricing
• Co-investing in some large-scale projects
• Extending some payment terms from 10 to 45 days

These moves are basically aimed at keeping existing customers in the game, as well as making the economics work for potential new clients. First Solar will feel the impact when it comes to the timing of cash flows and revenue recognition, and it may even get caught with uncomfortably large inventories in the first half of the year, but the firm thinks it can more or less maintain its target of 20% return on net assets.

The greatest threat is probably posed by overproduction. For now, First Solar is operating at full capacity, whereas PV players like JA Solar (Nasdaq: JASO  ) have already been forced to idle production during this downturn. Along with SunPower (Nasdaq: SPWRA  ) (Nasdaq: SPWRB  ) , the thin-film king appears to be one of the best-positioned solar players to ride out this rough patch.