First Solar Outlook Shines Bright

We continue to like the First Solar, Inc. (FSLR) story and the growth potential for the solar industry in the aggregate. Looking ahead on the upside, we support management’s focus on long-term capacity build-out and technological enhancements, rather than striving for optimal near-term results.

First Solar’s growth story will continue with its order backlog surpassing $6 billion, higher capacity online at its Malaysian and Ohio facilities, lower dependence on the German market, declining cost per watt, its ongoing all-stock acquisition of OptiSolar, and new utility scale PV [photovoltaic] system deployments in the United States.

However, a falling Euro in light of its focus on Europe, declining governmental subsidies for solar initiatives, tightening credit markets, and the modules oversupply situation in the market may partially hamper short-term growth.

Also, the company’s initiative to finance its customers to avoid order cancellations is a risky proposition. Previously, the company’s reliance on low cost thin-film cells helped it avert a silicon shortage, which adversely impacted the bottom-line of other solar companies. As a result, First Solar was consistently able to produce and sell its solar cells for a lower cost than its competitors.

The cost advantage is slated to continue as two more facilities at its low-cost facility in Malaysia will commence production in 2009. The company confirmed that Malaysia’s production lines have a $0.20 per watt cost advantage over is USA and German facilities.

Nevertheless, uncertainty surrounding the long-term alternative energy policy in the U.S. and Germany may present some downside risk.

While FSLR trades at a premium to its comparable peers in the alternative energy industry, at the upper-end of each range of relative price-to-earnings, price-to-book value, price-to-sales and price-to-cash flow, such premium valuation metrics may be justified by the company’s historical record of strong and consistent top-line and bottom-line growth, as well as long-term EPS growth expectations significantly above most comparable public companies in the alternative energy space.

As with most alternative energy companies, FSLR is currently valued, in part, on more optimistic future expectations, and if the company lives up to these expectations and the solar power industry evolves globally as expected, FSLR may prove to be a great long-term investment. Accordingly, we maintain our BUY recommendation with a six-month target price of $150.00. Price appreciation to our near-term valuation target represents 24.8% upside potential.

First Solar, Inc. designs, manufactures, and sells solar electric power modules using a proprietary thin film semiconductor technology.

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