The solar investment tax credit (ITC) is going to be a boon for solar companies like First Solar (NASDAQ:FSLR) over the next five years, but in 2016 it's having some strange impacts on the company's finances. It'll push some projects back and pull some projects forward all because of the timing of contract requirements and tax benefits.
That's why when First Solar reported fourth quarter earnings figures it said profits were better than expected, but also gave fairly disappointing guidance. But that doesn't tell the whole story of First Solar.
The cash keeps rolling in
Let's start with the basic numbers. During the fourth quarter, First Solar reported sales of $942 million, gross profit margin of 24.6%, and net income of $164 million, or $1.60 per share. Production was up 50% year over year to 761 MW in the quarter and efficiency increased 170 basis points to 16.1%.
Profits are rising because First Solar is executing incredibly well on efficiency improvements, squeezing more energy from each panel installed, and cutting costs on installations. Combine those two and First Solar will begin winning more projects at higher margins than in the past year or two.
Cash also increased to $1.83 billion, a key for the company's ability to build projects before they're dropped down to its yieldco 8point3 Energy Partners (NASDAQ: CAFD). It's that yieldco that helped drive a reduction in guidance.
One of the surprises in the quarterly report was a reduction in 2016 guidance. You might think the ITC extension would help companies in 2016, but it actually makes installations this year less urgent than they would have been otherwise.
Net sales guidance dropped $100 million to a range of $3.8 billion to $4.0 billion. Operating cash flow expectations also declined to $400 million to $600 million. The good news is that gross margin guidance was tightened higher to 17% to 18%.
Normally, a decline in guidance would be bad news, but First Solar is just moving projects around because of the ITC. When guidance first came out, management was planning on completing key projects by the end of 2016 to get credit for the ITC. After the extension, some of those projects could be pushed into 2017 to take advantage of the company's continued cost reductions. This should mean higher profits in 2017 and beyond as a result of the delays.
First Solar is winning projects rapidly
After shipping 2.9 GW of product in 2015, the company added 3.4 GW of backlog. As recently as a year or two ago, First Solar wasn't able to refill its backlog because low cost silicon solar panels provided greater efficiency and lower costs than thin-film solar panels. So it put a focus on efficiency -- that's why you see the improvement in performance of late.
With the ITC extension in place and a solid balance sheet, I think First Solar will see more project wins and expanding margins as well.
8point3 Energy comes with some uncertainty
The one factor of uncertainty that comes with a business like First Solar is dropdowns to its yieldco 8point3 Energy Partners. First Solar is now holding projects on its balance sheet for 8point3, and pushing projects back into 2017 affects the timing of those sales. Again, long-term the yieldco strategy will be a positive one for First Solar, but it could lead to very lumpy results in the meantime.
Eye on the prize
First Solar continues to make steady progress on cost reductions, efficiency improvements, and market expansion. As it does, the company's future looks considerably brighter. This is one of the solar industry leaders, and with growth expected to explode in the next decade I think it's a stock to hold onto for a long time.