Category: Financial Markets
Business Strategy and Outlook
First Solar’s strategy has pivoted back to its origins as a supplier of thin film solar modules following the exit of its North American development business, and its operations and maintenance business in 2021. The company’s development business supported profits during 2012-17 when First Solar’s module business faced challenges. However, margins in the business became compressed in recent years, and it is likely the company made a prudent decision to exit the business given increasing need for scale. The company retains modest development activities in Japan, but it is not seen, these as core to its long-term strategy.
Upon taking the helm in 2016, CEO Mark Widmar has led the successful execution of the transition to its Series 6 module. This was a major transition for the company and came at a hefty price tag–$2 billion in capital expenditures–but has resulted in a better competitive position compared with its prior module generation (Series 4). Further, the company’s sales efforts have become increasingly focused on select end markets. The U.S. and India represent approximately 90% of booking opportunities, where trade policies leave the company in a more favorable competitive position. In particular, the company performs well in the U.S. utility-scale market, where it is projected, its market share to be approximately 30%.
Financially, the company is focused on leveraging scale benefits to drive margin improvement. Given continued expectations for declining selling prices and a largely fixed operating expense profile (circa 80% fixed), the key lever to grow operating margins is through capacity additions. It is largely definite with many of the company’s strategic moves in recent years. However, it is questioned whether a pure module supplier can achieve consistent excess profits. It would be interesting to see the company seek adjacent revenue opportunities- for example, balance of system components- to complement its module business.
Financial Strength
First Solar’s financial strength stands alone relative to solar module peers. It is considered that this a competitive advantage because it allows First Solar more flexibility to take advantage of investment opportunities. The company carries essentially no debt besides project debt associated with its Systems business and holds more than $1 billion in cash and investments as of late 2021. First Solar’s financial strength is in part due to its conservative approach to expanding capacity, which is in stark contrast to the track record of the broader industry. Cash flow generation has been weighed down by working capital in recent years, but it is probable, this should normalize over the medium term. Capital expenditures will be elevated for the next few years, due to large-scale manufacturing expansions in the U.S. and India. It is likely, the potential for local debt (India) and potential incentives (U.S.) to help fund part of the associated capital expenditures. Given its robust level of cash and investments, combined with continued steady cash flow generation, It isn’t seen the elevated capital expenditures posing a threat to the company’s financial position.
Bulls Say’s
- First Solar’s balance sheet strength has enabled it to persist through solar cycles when competitors have failed.
- First Solar’s thin film cadmium telluride technology is unique within the industry and benefits from its simple manufacturing process and supply chain.
- First Solar is well positioned to benefit from potential U.S. manufacturing incentives.
Company Profile
First Solar designs and manufactures solar photovoltaic panels, modules, and systems for use in utility-scale development projects. The company’s solar modules use cadmium telluride to convert sunlight into electricity. This is commonly called thin-film technology. First Solar is the world’s largest thin-film solar module manufacturer. It has production lines in Vietnam, Malaysia, and Ohio. It plans to add a large factory in India.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
It is seen Onsemi is a power chipmaker aligning itself to the differentiated parts of its portfolio in order to accelerate growth and margin expansion. It is probable Onsemi to outpace the growth of its underlying markets over the next five years as it tailors its portfolio of transistors, analog chips, and sensors to pursue secular trends toward electrification and connectivity that allow it to sell into new sockets. Specifically, Onsemi is the top supplier of image sensors to automotive applications like advanced driver-assist systems, or ADAS, and its semiconductors enable power management and conversion in electric vehicles, or EVs, and renewable energy–all of which is likely to keep Onsemi’s sales growth above that of the broader semiconductor industry.
It is viewed onsemi will be vulnerable to modest cyclicality in the short term, but think its portfolio realignment will lend itself to more durable returns through a cycle. The firm’s increased focus on sticky verticals, as well as its differentiated sensor and silicon carbide technologies, contribute to Analysts narrow economic moat rating. Onsemi’s bread and butter historically was in more commodity like discrete power chips, but it is probable for it to focus on higher-value applications in the automotive and industrial end markets going forward and in turn earn more consistent returns on invested capital.
It is seen Onsemi will focus on expanding margins over the medium term. Management invested heavily in pruning and improving its manufacturing efficiency in 2018 and 2019, and it is alleged it see the fruits of these efforts after 2022 when Onsemi fully acquires its first 12-inch fab. It is also alleged the firm will focus its investments on the automotive and industrial markets–higher growth and higher margin than its legacy consumer and smartphone markets. It is seen management faces execution risk in hitting its lofty goal of 48%-50% adjusted gross margin, but expect both a focus on higher-margin verticals and an improved manufacturing footprint to get it to the high-40% range in the next five years–from a previous midcycle margin below 38%.
Financial Strength
It is probable Onsemi’s primary financial focus in the medium term will be generating free cash flow and paying down debt after hefty investments over the last five years. Onsemi took on more than $2 billion debt for its 2016 Fairchild acquisition, and also committed over $1 billion in capital expenditures between 2018 and 2019 to improve its manufacturing footprint (shuttering inefficient fabs and purchasing equipment for its new 12-inch fab). Management has a stated goal of holding off on new share repurchases until the firm meets its 2:1 net leverage goal (net debt/adjusted EBITDA). As of the end of fiscal 2021, Onsemi held $1.4 billion in cash compared with $3.1 billion in total debt, putting its year-end net leverage at 0.88 times. It is projected Onsemi to generate an average of $2 billion in free cash flow through 2026-even while committing roughly 10% of sales to capital expenditures-and seen the firm can use its extra cash to resume repurchases. If Onsemi were to come into a liquidity crunch, it has $1.3 billion available (as of end-fiscal 2021) under its $2 billion revolving credit facility.
Bulls Say’s
- Onsemi’s image sensors are best of breed in the automotive market, with a leading market share in high-growth, mission-critical applications like ADAS.
- It is viewed Onsemi will continue to outgrow its underlying markets and the broader semiconductor industry by selling greater dollar content into applications like cars and servers, which also helps stave off its vulnerability to market cycles.
- Onsemi is focusing its portfolio on the automotive, industrial, and cloud markets, which is seen, will expand margins and create stickier customer relationships.
Company Profile
Onsemi is a leading supplier of power and analog semiconductors, as well as sensors. Onsemi is the second-largest global supplier of discrete transistors like insulated gate bipolar transistors, or IGBTs, and metal oxide semiconductor field-effect transistors, or MOSFETs, and also has a significant integrated power chip business. Onsemi is also the largest supplier of image sensors to the automotive market, targeting autonomous driving applications. The firm is concentrated in and focused on the automotive, industrial, and communications markets, and is reducing its exposure to the consumer and computing markets.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
