Can First Solar (FSLR) Maintain Its Stellar Show in 2018?

First Solar Inc. FSLR has exhibited a solid bull run to date in 2017. The stock has more than quintupled the broader market and returned 112.1%, so far this year, compared with S&P 500 index's gain of 20.2%.

When most of the U.S.-based public solar companies like SunPower Corp SPWR, 8point3 Energy Partners LP CAFD and Vivint Solar, Inc. VSLR did not gain more than 60% over the year, First Solar’s stellar performance underscores the inherent potential in the stock.

Notably, Trump’s walking out of Paris accord this June has been a primary reason behind majority of solar companies in the nations of not recording substantial growth. Realizing that the time is right, First Solar announced plans of taking a loan worth $64 million from Mizuho Bank on Jun 9 to finance its utility-scale solar project pipeline in Japan and install solar modules. Since then, the company has accelerated its expansion plans in foreign lands.

Not only a well planned expansion strategy was instrumental in driving First Solar’s growth, few other factors also helped the stock gain momentum. Below we have discussed the factors which have boosted this Zacks Rank #3 (Hold) company maintain its robust performance throughout 2017. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Prospects in the Global Solar Market

Solar power has become the viable alternative energy source today. GTM Research’s latest ‘Global Solar Demand Monitor’ report states that eight countries will surpass the 1 gigawatts (GW) level of annual Photovoltaic (PV) installations by the end of 2017. By the end of 2018, five more countries will achieve the milestone.

With China having established itself as the world’s largest market for solar panels, First Solar has identified solid growth prospects there, courtesy of its thin-film solar modules. Apart from China, the company also boasts a strong footprint in Australia and Japan. Evidently, during third-quarter 2017, in Australia, First Solar signed new module supply agreements of 240 megawatts (MW), thereby totaling its contracted delivery pipeline of modules to over 500 MW in the nation.

In Japan, First Solar booked 21-MW DC systems project, which took the total contracted pipeline in Japan to over 240 MW DC. First Solar has also increased its focus in the growing Indian solar market. It has announced plans to develop solar capacity of 5 GW by 2019 to support India’s plan to install 100 GW of solar electricity by 2022. India’s goal to ramp up its solar market will likely benefit the company at large, under the Batch 1 phase II of the National Solar Mission.

Recently, the company set foot in the untapped solar market of Pakistan, by collaborating with Zorlu Holding, for delivering more than 860,000 of thin film modules. The modules will be used to power a 100 MW AC facility.

The aforementioned discussions clearly reflect the strong growth opportunities First Solar enjoys in the international market, particularly in Australia and Japan. As of Sep 30 2017, the company had $0.5 billion of net PV solar power systems that had been placed in service primarily in international markets.

Series 6 Module Launch

Earlier this month, First Solar launched its latest product line — Series 6 PV module ­— at its 2017 Analyst Day as well as issued 2018 guidance. The company projects this product to enter the market with a power rating of 420-445 watts and conversion efficiency of over 17%. These modules will provide more watts per lift than comparable crystalline silicon solar panels and can be installed on virtually any ground-based PV mounting system.

First Solar expects to start commercially manufacturing these modules by early second-quarter 2018. On being operational, Series 6 will have an annualized output of 600MWdc at full capacity.

Moreover, First Solar plans to double production capacity of Series 6 modules at its under-construction Vietnamese facility. Following this, annualized production capacity at this, when fully operational, will be 2.4GWdc. Cumulatively, from its facilities in Perrysburg and Kulim, Malaysia the company will be able to attain manufacturing capacity of approximately 5.4GWdc by 2020, for Series 6 modules. Toward this end, First Solar aims to invest $1.4 billion.

Despite the company’s 2018 outlook not being impressive on a year-over-year basis, its share price has surged 7%. This reflects investors’ optimism toward the launch of its next-generation PV module. The increased cost for the production of Series 6 modules have led to the drab outlook.

We expect the company to gain substantially once production starts at full capacity and positive accretion is realized from the sale of this latest module. If this happens, then First Solar’s 2018 outlook can improve.

Solid Bookings Reflecting Strong Demand

First Solar enjoys a solid booking across the globe, which in turn reflects strong demand for solar PV modules. On a year-to-date basis (as of Sep 30, 2017), the company reported bookings of 6.7 GW. First Solar expects to eventually increase EPC and O&M services which will improve its overall systems bookings number. During the third quarter, the company’s bookings of 4.5 GW were geographically diversified, with solid demand witnessed in India, Asia-Pacific and Europe, outside the United States.

In fact, management has described the company’s third-quarter bookings as a record one, which in turn reflects both the robust market demand for Series 4 and Series 6 module technology and the acceleration of procurement timing by customers.

What’s Ahead for the U.S. Solar Industry?

Although Trump has been intending to revive the coal industry for long, realizing the fact that renewables are our ultimate future, most of the utility providers are continuing with their transition from fossil fuel to alternative fuels. A U.S. Energy Information Administration (EIA) report projects total renewables used in the electric power sector to increase 41% in 2018.

The prospect of solar is still bright in the United States. An EIA report indicates growth in utility-scale solar power capacity by almost 41% from 22 GW at the end of 2016. The projected increase will bring the amount of solar capacity to 27 GW at 2017 end and to 31 GW at 2018 end. Solar will still constitute just 1% of total U.S. utility-scale generation in 2018, indicating immense scope for growth.

Notably, the U.S. market accounted for 83% of First Solar’s revenues in 2016. With EIA projecting solar consumption in the country to go up 119% to 0.933 quadrillion British thermal unit in 2018 from 2015, prospect of this company’s expansion in the domestic market also remains huge.

Should You Retain FSLR Stock in Your Portfolio?

We believe that First Solar is a profitable stock which could be a prudent long-term bet for risk averse investors, given its strong presence in the global solar market. Toward this, First Solar has already set the industry benchmark for its modules with over 17 GW installed worldwide and a proven performance advantage over conventional crystalline silicon solar modules.

Year to date, the company’s share price has gained 112.1% compared to Zacks Solar industry’s gain of 57.6%.

On the valuation front too, the company looks promising. The stock currently trades at net cash/market cap multiple of 19.24x, which is lower than the peer group average of 23.74x, thereby reflecting scope for improvement. Moreover, the current-year Zacks Consensus Estimate for First Solar surged 23.5% over the last 60 days.

Further, First Solar has a VGM Score of A. Notably, the VGM Score rates each stock on their combined weighted styles, helping to identify those with the most attractive value, best growth, and most promising momentum, across the board. This assures our point that the stock has still ample potential.

To conclude, strong demand for advanced thin-film modules, expanding solar market across the globe as well as business enhancement that the company has been carrying out both in the domestic and foreign lands, will enable First Solar to maintain its outperformance in 2018 as well.

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