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Why First Solar’s Tariff Windfall May Not Be as Big as You Think

By Travis Hoium - Oct 13, 2017 at 8:00AM

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It seems like First Solar should be the clear winner if tariffs are put on solar imports, but the upside may not be what you think.

There's a general view in the market that First Solar (FSLR 0.03%) is going to be the biggest winner among the solar companies if the Trump Administration puts tariffs on solar imports. Logically, that seems to be true because the company's thin-film panels aren't included in the trade case and First Solar has the biggest solar manufacturing plant in the country.

What that view doesn't take into account is the amount of product in 2018 (when tariffs would take effect) and beyond that First Solar has already booked. It may not be getting as big a windfall as most investors are expecting.

Large, utility scale thin-film solar installation by First Solar in the desert with partly cloudy skies in the background.

Image source: First Solar.

First Solar's supply and backlog snapshot

Management laid out First Solar's supply and contracted backlog for the second half of 2017 and 2018 in the last conference call. Here's what CEO Mark Widmar had to say: 

Our anticipated Series 4 supply across 2017 and 2018 remains between 3.6 Gigawatts and 3.8 Gigawatts, depending on when we see Series 4 production at our Ohio plant. With 1.2 Gigawatt DC of volume shipped through the end of June, and combined project and module bookings of 2.1 Gigawatt DC, we have a remaining Series 4 supply of between 300 Megawatt DC and 500 Megawatt DC.

Only 300 MW to 500 MW of production next year is unsold, and if First Solar could capture the full proposed tariff of $0.32 per watt (highly unlikely) the windfall would only be $160 million. Given public comments by a competitor, First Solar may have already sold a big chunk of the available production ahead of any tariff decision, so there may be very little that's unsold in 2018. 

Under the current plan, all Series 4 panel production will stop in the middle of 2018 as the company transitions to Series 6. And only about 1 GW of Series 6 panels will be produced in 2018. Production ramps to 3.5 GW in 2019 and just under 4 GW in 2020, but the real opportunity will be the period shortly after tariffs are introduced. And First Solar may not have much capacity to generate windfall profits if panel prices rise sharply in the U.S. 

Management has said that it has some flexibility to keep producing Series 4 modules for a while longer, but the transition to Series 6 will eat away at the available supply in the critical 2018 calendar year. 

The time to strike is now

Next year is key for First Solar if tariffs are announced because it gives competitors the least time to react. By 2019, we could see manufacturers open up plants in the U.S. or find places to manufacture that circumvents tariffs. 

We already know that Singapore and Canada are currently exempt from the tariff discussion, and Canadian Solar (CSIQ -0.06%) has a plant in the latter. SunPower (SPWR -1.01%) has a pilot line in the U.S. and could build its high-efficiency modules to serve the domestic market. Even Tesla (TSLA 1.24%) has said it wants to produce 1 GW of solar panels in Buffalo, New York, so it could build panels that aren't subject to tariffs. 

The window First Solar has to capitalize will be short, and the company's backlog may not leave much room for a windfall. That's something to keep in mind when thinking First Solar is an easy winner if solar tariffs are announced by President Trump early next year. 

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Stocks Mentioned

First Solar, Inc. Stock Quote
First Solar, Inc.
$68.15 (0.03%) $0.02
Tesla, Inc. Stock Quote
Tesla, Inc.
$681.79 (1.24%) $8.37
SunPower Corporation Stock Quote
SunPower Corporation
$15.65 (-1.01%) $0.16
Canadian Solar Inc. Stock Quote
Canadian Solar Inc.
$31.12 (-0.06%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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