There are earnings beats and there are earnings beats. What First Solar, (NASDAQ:FSLR) just delivered was the latter in the third quarter.
Not only did revenue and earnings trounce expectations, First Solar increased its own guidance for the year and signed new contracts that will add to sales all the way into 2018. There's not much that could be going better for First Solar right now.
The headline numbers
Revenue for the third quarter was $1.27 billion, up from $889.3 million a year ago. Part of that growth was the sale of a majority stake in the Desert Stateline project, of which First Solar kept a 49% stake in the project's cash flow. Eventually, even the piece of the project that First Solar still owns will likely be pushed down to 8point3 Energy Partners (NASDAQ:CAFD) to generate even more up front cash. Long-term, look for this 51/49 ownership structure to be more common because it provides enough upfront cash to pay for installation while keeping some long-term cash flows.
The sale helped gross margin reach 38.1% in the quarter and net income of $346 million, which translates to $3.38 per share.
The project sale helped margins, but First Solar also benefited from a $70 million reduction in module collection and recycling obligation estimates. The company has committed to collecting and recycling CdTe modules when they reach the end of their useful life, which means it has to estimate the cost it will incur in the future. A study done during the quarter revealed that First Solar has overestimated how much it would cost to collect and recycle panels in the future, leading to the benefit you see this quarter.
Beyond the headlines
What I've been watching closely at First Solar is progress panel efficiency. In the third quarter, fleet average efficiency increased 40 basis points to 15.8% and the best line increased 20 basis points to 16.4%. That puts it at the top end of the efficiency range of multi-crystalline solar panels, which are the commodity product coming from China today. As this figure improves the company's competitive position improves so every bit of progress is important.
The other important thing is capacity utilization. First Solar ran at 94% of capacity last quarter, up 9% from a quarter ago and up 17% from a year ago. That's the fruit of higher efficiency panels paying off.
First Solar also announced 129.8 MW of new solar power purchase agreements and a 400 MW module sales agreement with deliveries in 2017 and 2018. New projects are big growth drivers because it allows First Solar to either sell systems immediately or drop them down to 8point3 Energy Partners to retain some long-term cash flow. That flexibility is a strength in the business model.
All of these moves help improve First Solar's competitive position and long-term cash flow. And with profits booming the company is one of the best stocks in the solar industry.
What First Solar sees ahead
Investors certainly liked the earnings beat, but management also increased guidance for the full year.
- Margins are expected to be three percentage points higher than previously expected in the range of 24% to 25%.
- Operating expenses will be $20 million lower than expected at $395 million to $405 million.
- Earnings will be $4.30 to $4.50 per share, well up from a previous range of $3.30 to $3.60 per share.
- All of this will add to net cash, which is expected to be $1.3 billion to $1.4 billion at the end of the year, at the top end of previous guidance.
The long game is paying off
A lot of solar companies have tried to wow the market with growth or new products but very few have built a long-term competitive advantage like First Solar has. That advantage is paying off with booming profits and a business that's gaining momentum. Keep in mind that cash flow from 8point3 Energy Partners hasn't started coming in yet, but next year that will contribute another $20 million or so in dividends for the company.
It may not grow as quickly as others, but First Solar's profitability and technological differentiation make it one of the best stocks in the solar industry. Investors are finally starting to see that differentiation matters and will play into the company's favor for years to come.