First Solar, Inc. (NASDAQ:FSLR) could be the only solar panel supplier with significant capacity to serve the U.S. solar market with tariff-free panels from 2018 to 2022, and it's already taking advantage of that position. If President Trump decides to put extreme tariffs on solar imports it could affect every major solar manufacturer, except First Solar's thin-film panels.
The result has been a flood of purchasing activity in 2017, which has driven panel prices higher as developers try to lock up any tariff-free supply they can in 2018 and beyond. But First Solar isn't waiting to see what the tariff ruling looks like: it's booking every sale it can while demand is strong.
Third quarter bookings were staggering
One of the biggest surprises of First Solar's third quarter was that it booked 4.5 GW of panel shipments, bringing the year's total to 6.7 GW in bookings. For perspective, the company will likely make about 2 GW of solar panels in 2018, and won't ramp to a 4.0 GW production rate until the end of 2019. In other words, management has already sold most, if not all, of its production through 2019 and into 2020.
According to statements on the conference call, First Solar will produce about 500 MW of Series 4 solar panels in the fourth quarter, 1 GW of Series 4 panels in 2018, and 1 GW of Series 6 panels in 2018. Implications are that Series 4 production beyond 2018 will be about 2.1 GW, although that could be increased if some Series 6 upgrades are delayed.
Altogether, Series 4 production of 3.6 GW and 2018 Series 6 production of 1 GW have been booked. The 7.4 GW booking number indicates that there is another 2.8 GW of Series 6 production that's already been booked. Management won't say exactly what it expects 2019 Series 6 production to look like, but current bookings will likely tap supply for the next two years.
Why book two years out?
It's interesting that First Solar would book two years worth of production ahead of a tariff decision that could leave it as the only cost-effective supplier on the market. But management is hedging its bets around the solar tariffs.
If tariffs don't materialize, First Solar will have locked in two years of sales at potentially elevated prices because developers didn't want to take the risk that they would have to pay tariff-inflated prices.
If tariffs do materialize, First Solar has some options to increase production to take advantage. It could delay some Series 6 upgrades to increase output by 1 GW in 2018. It could also expand lines in the U.S. and Malaysia to increase Series 6 production long-term. The challenge is that the Series 6 buildout may not add to production until late 2019 or into 2020, so that's more of a long-term play.
Get while the getting is good
First Solar's management clearly doesn't see any upside in waiting for the tariff case to reach a conclusion and is instead locking in sales while it can. That's likely a good idea given the uncertainty around the tariff case, even if the company gives up some potential profit as a result. What investors will want to keep in mind is that 2018 and 2019 sales will be at an artificially elevated margin as a result. Without tariffs, First Solar will be in a weaker competitive position in the U.S., and we shouldn't be surprised if profits fall as the tariff-related windfall subsides two years from now.