Solar Winter Could Be Worse Than We Thought
12/16/2011 3:43 pm EST
Woof! On December 14, First Solar (FSLR) delivered a gut-wrenching conference call.
The big item wasn’t the reduction in projected earnings for the year that ends in December to $5.75 to $6 a share, from the previous estimate of $6.50 to $7.50. It wasn’t even the shocking reduction in projected 2012 earnings per share to $3.75 to $4.25, a far cry from the Wall Street consensus of $7.20.
The big item was First Solar’s plan to gradually exit subsidized solar markets completely. After describing the huge increase in supply—largely out of China—and the slowing of demand growth from the reduction or elimination of solar subsidies, CEO Michael Ahearn told analysts and investors that First Solar was:
"...shifting our revenue base from subsidized to sustainable markets, starting in 2012. It won't happen overnight, and we'll have to transition out of the subsidies we currently depend on, but our goal is to shift progressively over the 2012 to 2014 timeframe, so that by the fourth quarter of 2014, we derive virtually all of our new revenues from sustainable markets."
In other words, First Solar doesn’t see solar markets returning to former profitability within that time next year or the year after, so the company has decided to concentrate on designing, engineering, and constructing utility-scale power plants rather than focusing on the sales of solar modules. (First Solar is a member of my Jubak Picks 50 long-term portfolio.)
That transition presents some big challenges for First Solar. To compete in the non-subsidized market, the company, by its calculations, will have to achieve a levelized cost of electricity of ten to 14 cents per kilowatt-hour. And that will require a reduction in production costs roughly 30% greater by 2015 than the company had previously projected for 2014. That’s a high bar to jump.
The transition also signals First Solar’s belief that the economics of the solar industry are permanently out of whack. Yes, at some point the current demand slump will force enough players out of the industry to put supply and demand back into balance. But that will be only temporary, Ahearn said.
Since there are no longer any technology barriers to entry in the silicon-based solar industry, supply will swing back to excess whenever capital is available. (Although First Solar produces thin-film solar modules based on cadmium telluride, rather than crystal silicon, it competes on cost with silicon solar companies.)
“In an industry without entry barriers, which we believe is the case for the polysilicon PV module industry, the easy reentry of competitors and expansion of capacity will keep downward pressure on prices and margins indefinitely,” Ahearn said.
That’s a rather grim assessment. (And somewhat longer than the assessment I offered in my November 15 post.) Which doesn’t mean First Solar is wrong, of course. If Ahearn is right, the key competitive edge in the solar sector isn’t technology, but cheap capital.
And we know where that’s available. Perhaps indefinitely. (Hint: It’s the country where the pandas live.)
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of First Solar as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.