First Solar Inc. (NASDAQ:FSLR) reports first-quarter earnings after the market closes on Thursday, giving us our first peek at the solar industry's financial results from 2018. The conventional wisdom has been that First Solar will be the biggest beneficiary of tariffs on imported solar panels imposed by President Trump earlier this year, and the company is likely seeing some benefit from them already.
What I'll be looking for in the earnings report are signs that First Solar's competitive advantage isn't driven by tariffs alone. Over the next four years, the tariffs will decline from their current 30% to 15% before expiring altogether, and when they end, the company's technology and manufacturing will have to compete in the global solar market. Here are the clues I'll be watching to see if First Solar is setting itself up for long-term success.
The first thing to look at is First Solar's performance versus its own guidance. The company hasn't given quarterly guidance, but it did lay out a full-year forecast for 2018, and will likely update that based on the most recent data it has.
|Net sales||$2.45 billion to $2.65 billion|
|Gross margin||21.5% to 22.5%|
|Earnings per share||$1.50 to $1.90|
|Net cash balance (end of year)||$2.1 billion to $2.3 billion|
|Shipments||2.9 GW to 3.0 GW|
The two metrics to watch most closely will be sales and gross margin guidance, which will indicate whether the solar farms being sold are going for more or less than expected, and whether manufacturing costs are coming in on target. First Solar has a history of under-promising when it comes to guidance, so don't be surprised if one or two of these guidance metrics get increased in the earnings report.
A major manufacturing upgrade
First Solar is making a big investment now to upgrade its manufacturing from the Series 4 solar panel model to the Series 6, which has a slightly higher efficiency. What I'll be watching is the progress of production (which should be starting in Ohio) and the efficiency of the panels coming off the line. There have been no delays thus far, and investors will expect that to continue.
In Q4 2017, efficiency was unchanged from a quarter earlier at 17%, but First Solar needs to push that figure higher to stay competitive long-term. Management has said solar panels with efficiencies over 20% are possible with existing technology, and it has a line of sight to efficiency over 23% on a panel level. Competitors like SunPower (NASDAQ: SPWR) are pushing efficiency to nearly 20% in mass-produced panels already, so First Solar needs to show that it's catching up now that Series 6 is beginning production.
What is the pace of orders?
One of the main factors that drove First Solar's stock higher in 2017 was a rush of orders that added 9.0 GW to bookings between January 2017 and Feb. 22, 2018 -- nearly two years of fully scaled production. Since then, management has been suspiciously quiet about new orders, which could be a sign that orders are slowing now that the tariff plan has been finalized.
First Solar is the only major U.S. solar manufacturer today, and its thin-film panels are exempt from Trump's import tariffs -- a set of advantages that has driven bookings and the 20%+ gross margin guidance I outlined above (higher than that of every other major solar manufacturer). But its tariff-related windfalls may not continue for long -- JinkoSolar and SunPower are looking to build U.S. manufacturing facilities. It's also possible that those 30% tariffs on solar imports are low enough that customers will be willing to pay them to buy competitors' products.
I'll be listening for what management sees on the demand and pricing fronts, because the company may not be in as strong a position now that tariffs have been implemented and competitors are ramping up their own U.S.-based manufacturing.
What does First Solar have to say about 2019 and beyond?
Most of what First Solar will produce for the rest of 2018 is already pre-sold, so I wouldn't expect a lot of surprises in the first quarter. But this is the first time management will tell investors how the solar market is shaking out since tariffs were put in place in February. The company needs to show it can maintain the sales momentum and pricing power it had in 2017 over the long term -- assuming it can.