FBR Capital Downgrades First Solar (FSLR)

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10:34:23 am on May 26, 2009

All  that insider selling in recent days hasn’t done much to sink First Solar (FSLR), but it’s taking a small hit on an FBR Capital downgrade this morning, off about 4%.  The company is being downgraded from Market Perform to Under Perform with a price target of $100. 

Here are the FBR Capital comments according to StreetInsider.com:

Polysilicon prices taking a nose dive. Checks over the past week suggest (quality) spot poly prices have declined to $65/kg, down 35% year to date, driven by: 1) weak end-market demand for si-based modules, and 2) an aggressive attempt by industry leaders like Hemlock, MEMC, and Wacker (all enjoying average fully loaded cost of $40/kg) to further increase their lead over the new entrants (which are estimated to have $80-plus/kg cost structure).

– From inexpensive but “quality” poly to inexpensive but “quality” si-based modules. Checks also suggest six inch solar wafer prices (in the spot market) have declined to US$3.50/piece, implying that finished solar wafers are now < US$1/watt. Assuming US$0.80/watt for turning wafers into modules, we estimate $65/kg poly to yield modules at a cost of US$1.60-US$1.80/watt. And even a rather aggressive GM of 20% implies si-based manufacturers could sell modules at US$2.10 (or EUR‚¬1.62, assuming 1.3 F/X) and compete head-to-head with FSLR.

– Recent checks indicate at least one of FSLR top customers has already switched from FSLR to a si-based module vendor for a project that is currently under construction.

– Takeaway from our KfW meeting in Germany: 1) Senior executives in charge of (PV) project origination and structuring told the firm that PV project financing has not improved as fast as they were expecting. Although KfW can finance less than 3MW to 5MW projects on its own, it is the larger projects, requiring a consortium of (3-5) banks that are slow to be approved. 2) Year-to-date project backlog (at KfW) is comprised of45% si-based and 55%-TF based. This is a dramatic change from CY08 mix of 80%-plus TF.

– Given the increased downside risk, as well as the current valuation premium given to FSLR, FBR Capital believes the stock will face a significant headwind over the next several months. With the U.S. market not taking off until sometime in CY10 in their opinion, with the PV demand in Europe (and Germany in particular) not improving as fast, and si-based module/system ASPs now offering attractive economic benefits, they believe FSLR will either end up owning more projects (as a means to better control its destiny, which should also complicate revenue recognition) or/and continue to accommodate the market by reducing ASPs well below what is dialed into the consensus.

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