Quietly, First Solar (NASDAQ:FSLR) is starting to regain its position as a power in the solar industry. For the past five years, it has slipped from its place as the industry's leader because Chinese solar panels flooded the market at low costs and higher efficiency than First Solar's thin-film.
But First Solar's technology is steadily improving, and it's leveraging a strong project building business to improve its fundamental performance and its overall outlook.
How First Solar has made a comeback
The single biggest key to First Solar making a comeback is increasing its panel efficiency to equal or better than low-cost Chinese suppliers. Their standard multicrystalline panels are 14% to 16% efficient, and for a long time, First Solar has been below that level.
In the past year, First Solar has increased its conversion efficiency by a full percentage point to 14.4%, in line with some competitors. Its best line ran at 14.8% efficiency in Q4 and has achieved 15.8% in Q1. On top of that, First Solar recently reached a record cell efficiency of 21.5% (cell efficiency will be higher than panel efficiency).
Changes are hitting the bottom line
With the increase in efficiency, First Solar should be able to lower costs, which appears to be what's happening. Gross margins in the fourth quarter were 30.6%, up 9.3% from the third quarter, and up 6% from a year ago.
Increased capacity utilization to 84% will also help costs. First Solar has struggled with selling systems so much recently that its utilization has dropped below 80% at times, and production plants have even been idled. In the future, this utilization could improve dramatically if orders keep coming in at a rapid rate.
Moving into high demand
Another highly encouraging sign is the 2.8 GW of bookings in 2014 and the first two months of 2015. This compares to 1.5 GW of shipments and brings the backlog to 4.0 GW.
For investors, this not only gives visibility into the company's future, it shows the momentum First Solar has, driven by the cost advantages of higher-efficiency modules. The hope is that this momentum continues, especially considering that First Solar will start getting a long-term benefit from some of the projects it develops.
A yieldco could unlock more value
Operating numbers are great, and momentum looks strong, but what the market is really enamored with this week is the potential of a yieldco with SunPower (NASDAQ:SPWR). A yieldco would be a publicly traded company that would simply own solar electricity generating projects (i.e., projects that have revenue) developed by either company and pay dividends based on the cash flows. This is similar to a REIT in real estate or an MLP in oil & gas.
What this would do is unlock long-term value for First Solar that is currently sold to investors who buy their projects. The joint structure with SunPower likely means both companies will be able to recognize revenue and earnings for the projects they sell and get cash flow from the business. But more details will come as the agreement is finalized.
The changing place of First Solar
For many years, I've been down on First Solar because it had fallen behind competitors in efficiency, pushing it out of markets like distributed solar and making it harder to compete on utility-scale projects. But the company's renewed focus on R&D and evidence that efficiency is indeed improving make me think there's a lot of upside for First Solar.
A yieldco with SunPower that would allow for long-term cash flows from projects it develops is just icing on the cake. First Solar is starting to regain its place in solar, and for investors, that's a relief considering how bad things have looked the last few years.