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On Jan 14, 2014, Zacks Investment Research upgraded First Solar, Inc. (FSLR - Analyst Report) to a Zacks Rank #1 (Strong Buy).
Why the Upgrade?
First Solar reported positive earnings surprises in 2 out of the past 4 quarters with an earnings beat of 33.6%. The company’s long-term expected earnings growth is pegged at 10%.
In the third quarter of 2013, the company’s top and bottom line surpassed the Zacks Consensus Estimate and the year-ago figures, primarily on the back of the Desert Sunlight and ABW projects, a surge in systems business project revenues and higher module sales to third-party customers.
Tempe, Ariz.-based First Solar is a comprehensive photovoltaic (“PV”) solar systems provider. The company has operations in several countries in North and South America, Europe, the Middle East, Africa and Asia. With its prominent presence in Japan and France, the company is expanding its operations in the emerging solar markets of India, Indonesia and the Middle East.
Globally, demand for renewable resources is gradually rising mainly due to a growing awareness among the masses about its benefits; thereby influencing utility providers to shift to solar, wind and water. We view this growing demand for solar powered energy as a catalyst for First Solar’s future operating as well as financial results.
We note that most of the U.S. states have rolled out renewable portfolio standards for electricity generation or have laid down targets for the future. The utility providers continue to diversify their power generation assets while adding new renewable infrastructure to their portfolio.
We remind investors that First Solar has a strong relationship with the U.S. utility companies and wins orders at regular intervals. On Nov 12, 2013, the company inked a power purchase agreements (“PPA”) with member cities of the Southern California Public Power Authority to provide electricity, generated from the 40 megawatt (“MW”) AC Kingbird photovoltaic solar power plant in Kern County, California.
Apart from winning orders from the domestic companies, First Solar is continuously receiving orders from the international clients for solar modules and other allied services.
Particularly, the company received numerous orders from the Japanese companies in 2013. In Nov 2013, First Solar started construction of a solar project in Kitakyushu-shi, Japan. In addition, the company signed an agreement with JX Nippon Oil & Energy Corporation to supply its high efficiency solar PV modules in Japan. The complete phase out of the nuclear reactors in Japan following the Fukushima disaster has increased demand for alternate resources to power this highly industrialized nation.
First Solar’s steady effort towards improvement of the product quality and service standards will help it to become an important solar product provider in the U.S. solar industry and in the global sphere. This will subsequently enable the company to receive orders at regular intervals. In addition, winning of the PPA ensures the company a steady cash inflow.
The present valuation also makes First Solar attractive. As of Jan 14, 2014, the company’s forward P/E multiple was 14.5x, a discount of 43.4% to the peer group average of 25.6x. The company’s return on equity of 12.8% was significantly higher than the peer group average.
Other Stocks to Consider
Some other stocks worth considering in the solar industry include JinkoSolar Holding Co., Ltd. (JKS - Snapshot Report), SunPower Corp. (SPWR - Analyst Report) and SolarCity Corp. (SCTY - Snapshot Report). While JinkoSolar and SunPower hold a Zacks Rank #1 (Strong Buy), and SolarCity carries a Zacks Rank #2 (Buy).