Both First Solar Inc. (NASDAQ: FSLR) and SunPower Corp. (NASDAQ: SPWR) recently reported first-quarter results that fell far short of estimates. Analysts may not have taken fully into account the amount of revenues that both companies have received in the past from sales of their completed projects.

This time was different. This time, both First Solar and SunPower held on to assets they might have sold before because those assets are destined for the two companies’ joint venture yieldco, 8point3 Energy Partners.

Analysts at Argus have now weighed in on First Solar following its first-quarter report and have also provided a look at the prospects for the yieldco. The short version is that Argus rates First Solar a Buy with a price target of $78 a share.

According to Argus, First Solar is the best positioned of all solar makers based on three factors. First, the company has managed to remain profitable while many of its competitors have not. Second, First Solar continues to invest in its technology; witness the recent acquisition of an intellectual property portfolio from General Electric. Third, the company has a solid balance sheet and is cash-flow positive. The yieldco offers “additional opportunities for the company to monetize projects.”

It is not all smooth sailing though. Argus expects lumpiness in quarterly earnings due to the timing of payments for projects. This is par for the course in the solar business and investors should be used to it.

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In the near term, through the end of next year, Argus expects demand for new solar projects to be pulled forward due to the expiration of the 30% investment tax credit at the end of 2016. The credit drops to 10% beginning in 2017.

The 8point3 yieldco joint venture is expected to be launched in the current quarter. The yieldco structure, like a master limited partnership (MLP) or a real estate investment trust (REIT), eliminates the double taxation of corporate profits and tends to lower the cost of capital to the company. SunEdison Corp. (NYSE: SUNE) spun off its own yieldco, TerraForm Power Inc. (NASDAQ: TERP), a publicly traded yieldco created last year that currently holds nearly 800 megawatts of solar generation and recently added 521 megawatts of contracted wind and solar in its acquisition of First Wind Holdings.

Regarding 8point3, Argus has this to say:

We view the move as a positive for FSLR shareholders as it will give First Solar the opportunity to boost liquidity by selling assets to the yieldco.

According to the U.S. Security and Exchange Commission (SEC) filings, First Solar is contributing its 100% ownership of a 20-megawatt Maryland Solar project to 8point3. The project has about 18 years remaining in a deal with FirstEnergy Solutions. Three California plants that generate 242 megawatts and in which First Solar will own a 49% stake at the time of the initial public offering (IPO) are also included. Existing sales agreement on the California plants ranges from 20.0 to 28.7 years.

SunPower is contributing 170 megawatts of generation capacity in which it currently owns 100% of all five projects. The company expects to enter into tax equity agreements on each of the projects prior to the IPO. Among SunPower’s contributed assets is a portfolio of residential generation totaling 39 megawatts and including approximately 5,900 homeowners. The length of the remaining sales agreements for these plants is 20 to 25 years and the weighted average length of time remaining on the household capacity is 17.5 years.

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First Solar would be having a good year even without the coming yieldco IPO. First quarter production volume rose 22% year-over-year and 6% sequentially to 540.3 megawatts, reflecting improvements in both technology and manufacturing efficiency.

The company increased its solar module’s efficiency to 14.7% in the first quarter. That is the rate at which the cell converts sunlight to electricity, and the first-quarter number is 120 basis points better than a year ago and 30 basis points better than reported in the fourth quarter. Argus expects efficiency to reach 16.3% this year, a level the company has already managed in pre-production modules.

The company booked 900 megawatts of new business in the first quarter and shipped 700 megawatts, yielding a book-to-bill ratio of 1.3. The company’s project backlog is approximately 3,900 megawatts, up from 3,700 megawatts at the end of 2014.

Argus winds up with some notes of caution on the stock:

• “The greatest risk for First Solar is that in radically reworking its go-to-market model, the company miscalculates the available market opportunity, particularly in the solar utility market outside the United States. We believe that the company has the large project personnel, experience, and track record to lead in the solar utility market on a global basis, much as it dominates in the U.S.”
• “At this stage, we believe that a primary risk to an investment in FSLR remains a resetting of industry valuations, as energy prices remain volatile, industry competition remains fierce, and strained government budgets create increased risk for subsidies.”
• “The decline in polysilicon pricing is pressuring pricing throughout the industry, even among First Solar’s customers.”
• “If the market for utility scale solar power generation does not expand significantly over the next few years due to cost factors or technological or political developments, First Solar would likely experience slower-than-anticipated growth.”

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First Solar’s foray into the ownership of solar projects increases the company’s financial risks and may significantly extend the time for a return on investment from such projects.

Shares of First Solar traded up about 1.4% in the noon hour Tuesday, at $57.56 in a 52-week range of $39.18 to $73.18. The consensus price target on the stock is $64.31, and the Argus price target is $78, including $12 per share in net cash.

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