What First Solar Left Out of its Guidance (FSLR, NRG, PCG, LDK, TSL, YGE, JASO, TAN)

After the market closed yesterday, First Solar Inc. (NASDAQ: FSLR) released its initial guidance for 2011. The guidance is higher and the company also sold a project.  Much was anticipated and there is more to it than just what the company is trying to say.

The company expects to post sales of $3.7 to $3.9 billion, higher than previous analysts’ estimates of $3.63 billion. First Solar plans to sell $2.8-$2.9 billion worth of PV modules and to gain $900 million to $1 billion in project sales. The forecast for fully diluted EPS is $8.75-$9.50, also above current EPS estimates of $8.61.

In a widely-expected deal, the company also announced that it has sold its 290-megawatt Agua Caliente project to NRG Energy Inc. (NYSE: NRG), for an undisclosed sum. NRG expects to spend up to $800 million on the project, which already has a 25-year power purchase agreement with Pacific Gas & Electric Co. (NYSE: PCG). First Solar expects to recognize the revenue from this sale in the second quarter of 2011.

The company said that it plans to double its manufacturing capacity by the end of 2012 and to produce operating cash flow of $1.0-$1.1 billion. The strong guidance is due to what the company called “diversifying global partner demand” and a sharper focus on developing utility-scale solar projects.

First Solar did not say anything about its 2,000-megawatt project in Ordos, China, the largest utility-scale solar PV project in the world. The company got the contract to build the plant in late 2009, but there have been protests from China’s own solar PV makers that the project was awarded unfairly and should be tendered for competitive bidding.

The Ordos project also lacks a contract for electricity it will generate, and without that the project will not proceed. First Solar has also not indicated that it will even bid on the project if the government does decide to tender it for bids.

That could tamp down the enthusiasm for First Solar shares in the short run, but may be better for the company in the longer term. If the company does go ahead with the project, First Solar will be subject to the rules governing foreign companies doing work in China. Specifically, the company would have to find a Chinese partner and that partner would own a majority of the joint venture set up to build the Ordos plant.

The implication of that is that First Solar would be forced to share its industry-leading cost structure with a partner. The company is currently the lowest cost provider of thin-film solar PV modules, and having to share its technology with a prospective competitor would not be in First Solar’s long-term best interests.

First Solar’s low-cost leadership is already being challenged by Chinese PV makers like LDK Solar Co. Ltd. (NYSE: LDK), Trina Solar Ltd. (NYSE: TSL), Yingli Green Energy Holdings, Co. LTD. (NYSE: YGE), and JA Solar Holdings Co., Ltd. (NASDAQ: JASO).

It’s likely that First Solar’s guidance does not rely heavily on the Ordos project. The company is banking on increased demand in the US, particularly from California, which has legislated a requirement that 33% of the state’s electricity come from renewable sources by 2020. Also, the tax bill currently making its way through the US Congress now includes re-instating incentives for renewable energy projects.

First Solar also noted that it retains 500 megawatts of unallocated modules for 2011, which it says it could offer at “more aggressive pricing” if the price for solar modules should tank next year.  The company could also use its project pipeline to soak up some of the unallocated modules.

First Solar’s story for 2011 is sound, but not bulletproof. Most of what the company had to say in its guidance announcement was already expected and has been priced into the stock. First Solar did not move the needle much one way or the other. But the potential downside could weigh more heavily than the upbeat outlook.

Analysts have already chimed in on First Solar shares and their targets:

• Needham raised it to Hold;
• Auriga reiterated ‘Buy’ with $167 target;
• Barclays maintained an ‘Equal-weight’ and $144 target;

First Solar shares were higher up over $140.00 this morning but now the stock is trading up only about 0.2% at $137.30.  The Guggenheim Solar ETF (NYSE: TAN) was higher this morning as well with an opening price of $7.50 after closing at $7.46 on Tuesday, but now shares are down 0.1% at $7.45.

Paul Ausick