First Solar Case Study

[Tijuana Strauhal]

Thiscase study addresses corporate finance issues related to company valuation, P/E multiples, return on investment and cost of capital. The issues for which you can check you comprehension of corporate finance are evaluated through investigating a case written up by the Stanford Business School for a company named First Solar. The case was written in 2010 and you are supposed to put yourself back in that period for most of the assignment. By focusing on an actual company, the case addresses management notions that they can maintain high returns in a business that is becoming more competitive.

Go the the bottom of the file and fill in the blanks for computing terminal value using (1) the constant growth method; (2) the multiple method; and (3) the value driver method (I have included two variants of this method). The formulas for the methods and the values are given; you just have to fill in a couple of values and come up with the equity value per share. This should make you think about some of the issues we discussed in the corporate finance session. The screenshot below illustrates the blanks that should be filled-in. Look for all of the yellow blanks.

In this case I want you to think about rate of return and how return, growth and risk affect corporate value. You absolutely do not have to read the whole long case, there is a lot of writing about competitive advantage and strategy which has some indirect implications. I would like you to only focus on just a couple of issues specifically related to corporate finance. I want you to compute some returns and make a very simple forecast to evaluate the value of the company.

This part of the case involves extracting stock price data for First Solar, a couple of its competitors and the S&P 500 index (as bankers, I believe it is helpful to get background on stock prices of companies who may be your clients.) The objective here is to practice with getting your hands dirty with some data, to see what happened to First Solar and to start thinking about why there were such dramatic changes in the value of the corporation.

Sometimes there may problems with implementing the stock price file. If this happens you can just use the file below. If that still does not work please send me an e-mail immediately at edward...@gmail.com.

In this section I would like you t0 use actual financial data for First Solar that was presented at the end of the Stanford case write-up to compute the return on invested capital and the return on equity for the years 2007, 2008 and 2009. After making the I have provided the balance sheet and income statement data you can use in making the return calculations as well as a guide to making the invested calculation. This data is in the file that you can download by pressing the button below.

In this section I would like you to review a stock analyst report of First Solar that was written after the case was published on 1 July 2011. The analyst report will be used to evaluate P/E multiples, earnings growth and projected ROE for First Solar. The screenshot below shows part of an analyst report that was published on 1 July, 2011 for First Solar. Look on the top left below the beta and you will see the target price for First Solar ranged between 445 and 295 for the years between 2014 and 2016. You will also see an annual return of 24% to 37%.

In this part of the case I would like you to use a file to make a simple valuation where you change the return on invested capital from year to year and also change the growth rate. A real analyses of corporate value would have detailed analysis of prices, volumes, operating expenses, history and many other factors. But at the end of the day, a corporate model boils down to what will happen to returns and how fast the company will grow. The general idea is that if you are earning more than your cost of capital on incremental capital expenditures, then you should grow and spend money on capital expenditures or supporting working capital. Consultants make a diagram of the valuation process with return on investment and growth rate as well as competitive advantage. This is illustrated in the screenshot below.

This case study is not about financial modelling but about corporate finance. I provided a simple model with return on invested capital, growth rate and cost of capital. I would like you to use the model to run and explain the effects of different returns, growth and cost of capital. In completing the third and fourth task below you will apply a model with varying growth rates and returns that use an interpolate function. To use this model in answering addressing the tasks, click on the button below and open the spreadsheet. Tasks for this part of the case assignment are listed below the button.

I have included a couple of other files for general background. You can download these files by pressing the buttons below. Some background reading that is not at all necessary for completing the assignment includes:

Even though First Solar has diversified into EPC and investments, much of their cash flow is driven by the price of panels. The price of panels is in turn driven by the market for poly-silicon panels. The dramatic price decrease in panels is shown in the two screenshots below.

Here are some quotes from the case that extol the prowess of First Solar management. Ultimate questions surrounding valuation are whether the company really was so exceptional and had such a big competitive advantage.

As the mercury once again climbed above 110 degrees and he glanced out at the sun drenched city of Tempe, Sohn realized just how far First Solar had come in its short existence; from an unproven start-up with novel technology to the leader in solar module placements worldwide.

In this final section I have included a couple of ideas that I think are important in corporate finance analysis. I have listed a couple of bullet points and some ways that you may think about the issues. I have also included references to my set of power point slides that describe corporate finance theory. These are in two parts of power point slides.

A little over a year ago, First Solar seemed to be on top of the world. The U.S. solar giant was one of the largest and most successful solar-panel manufacturers, and solar power plant builders, in the world. It had the lowest manufacturing costs in the industry and the highest market capitalization of any solar-panel manufacturer.

Subsidized markets can be unpredictable, and subject to shifting political winds. After higher-than-expected costs for a feed-in tariff in Spain, the government ended the program and the market disappeared. Similar things have happened in other countries. That unpredictability makes it difficult to plan how many factories to build.

Breaking into these new markets may prove challenging, though. Without a government guarantee of a return on investment, as is the case in Germany, it will likely be harder, at least at first, to convince banks to finance large projects, and companies could run into problems negotiating local politics in India.

The case relates to accounting quality analysis conducted by the leading research firm Center for Financial Research and Analysis (CFRA) on companies in the solar industry with a focus on First Solar Inc. In 2009, CFRA was concerned that First Solar, like much of the solar industry, was facing deterioration in business prospects and exposed to risks arising from revenue recognition, high inventory levels, lack of customer and geographic diversification, aggressive warranty policies, excessive production capacity growth, and supply chain risks. The case places students in the shoes of CFRA analysts who need to assess First Solar's accounting quality and business prospects after the company releases its second quarter financial numbers in 2009. The case provides students with background information on the solar power industry, First Solar, data from CFRA research, and First Solar's quarterly reports and the earnings conference call to analyze and draw conclusions about First Solar's accounting practices and strength as a company. Students have to decide whether CFRA should flag First Solar as a concern and add it to CFRA's "Biggest Concerns" list.

As a developer, Kitson recognized he impacts the environment, so Babcock Ranch was an opportunity to focus on sustainable, resilient and innovative practices to mitigate the environmental impact. However, building a town near a wetland while preserving those natural resources required research into the historical waterways of the land. There was also no clear-cutting of the native vegetation.

The builders created Innovation Way, a model park to explore the next era of home building using sustainable technology and innovations from new HVAC systems to gray water recycling. The end goal is to install the new systems in future development.

Kitson worked alongside Florida Power & Light Company for eight years to incorporate renewable energy into the infrastructure. Almost 700,000 panels span 870 acres and produce 150 megawatts of energy. That energy can power 30,000 homes and is the emissions equivalent of removing 28,000 cars from the road annually.

Part of what makes Babcock Ranch attractive is the commitment to renewable energy and the integration and accessibility of those resources for residents. An 840-acre solar panel farm is home to two solar energy centers, the FPL Babcock Ranch Solar Energy Center and the FPL Babcock Preserve Solar Energy Center, operated by the Babcock Ranch developer and Florida Power & Light.

The average Energy Use Intensity for commercial buildings is 14.6 kWh per square foot, varying by use, so the array can support 1,890,961 square feet of commercial facilities. Commercial buildings and some homes are fitted with rooftop PVs, reducing the demand for the PV array.

When properly installed, Kitson said solar panels can withstand harsh weather phenomena as the energy center did through Category 3 and 4 hurricanes. The first test was Hurricane Ian, a Category 4 storm. No homes lost power, internet, or access to clean water.

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