First Solar (NASDAQ: FSLR) continues to show why the smart money loves the stock. The leading U.S. solar company beat both top- and bottom-line expectations for its fourth quarter and guided for a bullish 2016, as demand for solar remains strong. While shares of the solar producer have predictably surged on the earnings report, it seems there is more long-term upside given the company's bullish guidance and the company's competitive advantages.
By the numbers
For its fourth quarter, First Solar earned $1.60 per share on revenue of $742.3 million, beating estimates by $0.82 per share and $13.29 million, respectively. Total production rose 50% year over year to 761 MW, and First Solar's capacity utilization increased 16 points to 100%. For all of 2015, First Solar earned $5.37 per share on record annual net sales of $3.6 billion and shipped 2.9 GW of modules. The company also added 3.4 GW in bookings.
Guidance for 2016 is strong. Management expects 2016 revenue of $3.8 billion to $4 billion, gross margin of 17% to 18%, and EPS of $4 to $4.50 versus consensus of $3.83 billion, 17%, and $4.12 per share, respectively. Aside from the bullish earnings report numbers, management stressed three additional things:
1. Strong balance sheet is a competitive advantage
First Solar ended the quarter with ending cash of $1.8 billion and a net cash balance of $1.5 billion, giving the company one of the strongest balance sheets in the industry. First Solar's strong balance sheet is a major competitive advantage for the company because it keeps First Solar's cost of capital low and allows the company to potentially acquire assets of distressed companies in accretive deals.
In addition, First Solar's yieldco 8point3 Energy Partners (NASDAQ: CAFD), which First Solar and SunPower (NASDAQ: SPWR) jointly launched in 2015, is doing well. Because 8point3 Energy Partners pays a dividend yield of just 5.55%, the yieldco can grow, and First Solar can profitably drop down assets, realize higher margins, and capture more value in the long run. The renewable-energy yieldco business model isn't dead and will add value for First Solar as long as it doesn't overstretch itself as SunEdison did.
2. Strong pipeline
First Solar achieved a book-to-bill ratio of 1.2 and recorded annual bookings of 3.4 GW in 2015, giving it a backlog of 4.4GW as of Feb. 23. Given the ITC extension in the United States, and the renewed focus on solar internationally after the Paris climate change agreement in December, there is much more growth ahead. First Solar believes that it has 20.3 GW of opportunities to capture, with about 40% in North America and another 40% in India, the Middle East and Latin America. A growing pipeline is important because it provides First Solar with more revenue visibility for the coming quarters and smooths out demand.
3. Improving efficiency
First Solar continues to improve its efficiency in both in the lab and on the marketplace. In the lab, First Solar broke the world record for Cadmium Telluride cell efficiency, with its cells hitting the 22.1% mark. On the marketplace, First Solar increased its fleet average conversion efficiency by 170 basis points year over year to 16.1% and improved its best line conversion efficiency by 160 basis points to 16.4% in the fourth quarter. Improving efficiency is important because higher conversion efficiency makes First Solar products more competitive and increases the company's margins. Because of the improvements, First Solar's full fleet module cost per watt dropped by 15% in 2015.
Given its best-in-the-industry balance sheet, increasingly efficient technology, burgeoning backlog, and forward P/E of just 16.8, First Solar is arguably undervalued and deserves a higher valuation. With the ITC expected to increase demand for another five years and the U.S. solar tariff expected to continue to protect domestic producers, First Solar has considerable upside left.
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