Shares of First Solar Inc. (FSLR 1.30%) jumped an astonishing 110.4% in 2017, the best performance among global solar manufacturers. Not only were its operations strong, but it also booked billions in sales for future years that should keep it profitable through the end of the decade.
As we turn the calendar to 2018, I think it's useful to look back at the highlights that made this such a good year for First Solar's stock.
Image source: First Solar.
The project surprise
First Solar has been one of the largest developers of solar projects in the U.S., a position that exposes it to swings in the value of projects as interest rates and investor demand change. In the company's second quarter, it beat on earnings and boosted guidance, but it was an increase in project values of around $150 million that drove the stock higher. This was a big windfall, but it's also a one-time event.
First Solar will reduce its exposure to project development to less than one-fifth of its solar panel production in the long term, and will aim to sell projects earlier in their development cycles, rather than holding them to completion as it did in 2017. That's probably the right strategic decision, but it makes gains from projects less likely in the coming years.
Tariffs were a tailwind
The biggest driver of First Solar's stock gains this year came from solar panel sales: The company booked over 6.7 gigawatts of new orders -- about two years' worth of production at its current rate. Some of that was driven by the fact that its panel prices won't be impacted by the tariffs on imported panels the Trump administration is expected to impose.
Customers were eager to lock up tariff-free solar panels for projects being built between 2018 and 2020, something First Solar could guarantee that competitors couldn't. The company benefited with a rush of bookings, which will likely guarantee profitability for the next two years, even after accounting for factory shutdowns to upgrade its manufacturing facilities.
More growth ahead
The other big change for First Solar in 2017 related to its production plans. The rising demand highlighted above gave management the confidence to boost its production capacity targets from the 4.0 GW it had planned by the end of 2020 to 5.7 GW. A site in Vietnam is being developed into a new plant that will manufacture more of its Series 6 solar panel, allowing one of its Malaysia plants to keep producing its older Series 4 product longer. You can see the production plan below.
Image source: First Solar Analyst Day 2017 presentation.
More production will give operating leverage to R&D and other expenses, which could drive higher profitability long term.
Can First Solar keep it up?
2017 was a year of surprises, both on an operating level and for First Solar's plans. But there won't be much room in 2018 for the company to deliver more surprises, good or bad. We know its production will be between 2.7 GW and 2.8 GW, and most of those panels have already been contracted. Management's guidance of $2.3 billion to $2.5 billion in revenue, a gross margin range of 22% to 23%, and earnings per share of $1.25 to $1.75 are about what we can expect. There's only a small margin for an upside or downside miss.
First Solar's stock may not double in 2018, but it's still one of the best positioned companies in the solar industry. And with an expected net cash balance of $1.6 billion to $1.8 billion at the end of 2018, it'll be able to capitalize on any opportunities that arise this year.
