Baird Equity Research analysts Ben Kallo and Tyler Frank rate First Solar as an Outperform, upgrading the rating of the company in light of recent numbers.
We are upgrading First Solar, Inc. (NASDAQ:FSLR) to Outperform and are raising our price target to $67. Although sentiment on FSLR has become extremely negative (even for FSLR), we view the company as a “best in breed” due to its leadership in building utility scale solar, continued cost/efficiency improvement in technology, and its balance sheet which should provide growth optionality moving forward. While we are upgrading on long-term ownership, we view the upcoming analyst day as a potential catalyst.
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Numbers have come down and First Solar outlook could surprise
First Solar, Inc. (NASDAQ:FSLR) will give 2014 guidance and potentially give outlook for ’15 and ‘16 at its upcoming analyst day. Street estimates were significantly reduced following FSLR’s Q1:14 guidance. We believe First Solar, Inc. (NASDAQ:FSLR) could surprise to the upside in its guidance based on continued cost reductions, expected efficiency gains, outstanding bookings, and total pipeline.
Pipeline concern valid but significant opportunity remains for arguably the best-in-breed when it comes to utility scale solar. Although bears argue First Solar, Inc. (NASDAQ:FSLR) will have difficulty replenishing its pipeline, current estimates show utility-scale solar project demand rising to ~39 GW in 2020. As a low-cost leader, First Solar, Inc. (NASDAQ:FSLR) should be able to capture a significant market share.
Efficiency gains continue on CdTe which could give the “pony another trick.” We believe efficiency will continue to rise as First Solar, Inc. (NASDAQ:FSLR) upgrades its manufacturing lines throughout 2014 which could allow the company to enter commercial rooftop applications.
Cost reduction from Q3 to Q4 significant and cost of panels and balance of systems should continue to decrease – possible update at analyst day – which should benefit margin in 2014+.
To yieldco or not to yieldco
We think management continues to evaluate a yieldco but, regardless of the outcome, new financing mechanisms in the industry will continue to lower system costs. First Solar, Inc. (NASDAQ:FSLR) will likely make a decision on pursuing a drop-down yieldco by year-end.
Increasing price target to $67
Our price target is based on a P/E multiple of ~16x our 2015 earnings estimate of $4.16/share. While a discount to SPWR (~20x), its closest comp, we believe it is warranted given First Solar, Inc. (NASDAQ:FSLR)’s utility focus.