Is There an Opportunity in First Solar?

“Earnings fine on First Solar (FSLR), but stock down 20% plus. Why? They missed on the revenue number below expectations. They didn’t book full gains from a project not completed which would have put them at the top of earnings. Instead, they are at low.” — Fox Business Network Bulls & Bears 10/28/2009

First Solar shares are enduring a nasty sell-off in extended traded as First Solar is down more than 15% following its third quarter earnings release. The company missed revenue targets by a wide margin as sales totaled just $480.9 million, much lower than the $529 million that was expected. As we have already seen in this earnings season, companies are expected to show strong revenue growth in order to support the recovery that the market has already priced in. Apparently, the 38% growth in the quarter was simply not enough to satisfy a market with higher expectations.

Keeping the revenue misstep in mind, the rest of the quarter was not a disaster. First Solar earned $1.79 per share, which was a nickel ahead of expectations. Net income rose to $153.3 million from $99.3 million in the period last year. Gross margins slipped to 50.1% from 56.1%, but that was somewhat expected with increased pricing pressures affecting the entire solar industry. Management has a better view of sales going forward as they raised their full year revenue range to $1.98 to $2.03 billion.

Financially speaking, this was a mixed bag quarter with a large miss in revenue, but FSLR was able to keep margins high enough to surpass earnings estimates. The reaction of the market in after hours trading is probably because many investors view this stock as a high growth story and any slip up in revenue decreases the attractiveness. At Ockham, we are not so quick to say that the growth story has kicked the bucket. First Solar had more than doubled revenue every year from 2006-2008, but we think it is unreasonable to expect that pace to continue. If the 4Q comes in where First Solar and analysts have it pegged, then it will have achieved growth of more than 60% on the year. That is nothing to scoff at in a year in which the global economy contracted and many energy investments were put on the back burner as fossil fuel prices were fairly low.

First Solar is relatively young as a public company, so we just initiated coverage on FSLR within the last month. We have an Undervalued stance on this company, as we believe the growth rate is certainly acceptable at the current price level. With the stock trading below $130 in post market, there is a multiple of just 17x this year’s earnings. Furthermore, according to Yahoo finance, FSLR has a PEG ratio of 0.58 based on earnings growth estimates for the next five years. As with any investment there are risks, which for First Solar include the possibility of government subsidies coming to an end. However, at the current price level we think that this could be a risk that is worth taking after the significant sell off. The third quarter results did not hold a candle to the company’s second quarter results, but that could be to the benefit of investors looking to gain exposure to a pure-play on solar energy.

Original post

Comments

[tc1:]

One of the most balanced and insightful assessments i've yet to read in the aftermath of this 3Q earnings report from FSLR.

Oct 29 02:13 PM

[AZtech:]

No better time to buy than when ignorant people are selling.

Oct 29 02:48 PM

[Jack Yetiv:]

I think the market sold off not only because of the revenue miss but also because gross margins had dropped from 56% in Q2 to 50% this quarter--and guidance for the 4th quarter was 41-44%. I suspect that the market concluded that this is not a gross margin trajectory that justifies a valuation of 17X this year's earnings--and I agree. I have posted about FSLR in SA for the past couple of years and have had this opinion previously--and the gross margin drop this quarter with guidance for additional drop simply confirms it.

I believe FSLR will increase sales another 20-30% next year over this year, but their earnings will not increase much because their gross and operating margins will be further compressed next year due to continued (though more muted) ASP declines.

Jack Yetiv

Oct 29 09:57 PM

[David Sullivan:]

The problem with investing in solar is that residential, kilowatt scale solar is dumb, while utility, megawatt scale is OK. Fortunately, few small businesses are doing suicide by solar. It is mainly just lawyers and Sierra club types and it couldn't happen to a nicer bunch.

Oct 30 08:36 AM

[bottoms-up:]

Perhaps Obama has been in the sun too long...

No pun intended.

Oct 30 10:13 AM

[Rohan C. Pease:]

Thanks for the well balanced and concise article on FSLR's earnings.

Oct 30 12:12 PM

[Chad Brown:]

FSLR is not a stock that can be evaluated using tools like PEG ratios, as this article tries to do. Having just returned from a solar trade show in Anaheim, I can report with some conviction that is is not at all clear who the "winners" will be in solar. FSLR is the market's "pick" to be the biggest winner. Certainly FSLR has the best past growth rate and the highest margins, and that might be a useful sign if the market were more mature than it is. The real question is which solar technology will emerge over the next several years as the most cost-competitive, and the past growth rates do not hold the answer. The volatility in the stock surrounding whether the sales number was above or below expectations, and the volatility in sales arising from the timing of the signing of a single sales contract suggests the market is focused on the wrong metrics for this stock.

Oct 30 12:41 PM

[Mark Anthony:]

There is NO MORE growth possible in FSLR. Not only that, at a future time they will have to completely terminate their solar panel business.

Why is it so hard a concept for the analysts to accept that tellurium, a critical material the FSLR rely on, is extremely rare, with global production only a couple hundred tons, most of which is already used by other industrial sectors.

FSLR is running out of bricks and mortar, according to Bruce Sohn:

Bruce Sohn: "...So I'll look at capacity....our ongoing work with efficiency and blind run rate afford us the ability to continue to expand after, even in the ABSENCE of bricks and mortar construction. ..."

It's been a very long time since they last announced the expansion of their new Malaysia new factory and their "copy-smart technology". Basically give them a piece of land and some construction money, they can quickly start another factory churning out solar panels on a 24x7 basis. And clearly they do not lack customers either. All their products are sold.

Are they really running out of bricks and mortar to build new factories, or run out of land to do so, or run out of cash to spend? Absolutely NOT. They must be running out of tellurium.

Watch the sales revenue of 5N Plus, FSLR's virtually exclusive supplier of CdTe. Their revenue has been flat for more than a year. nearly 70% of 5N Plus sales is raw material sales to FSLR. How could FSLR expand exponentially when it is not buying more from 5N Plus. Each and every question thrown at FSLR on tellurium supply has been deliberatedly avoided and you could never get a straight answer. When are they going to tell the truth?

Full Closure: I have no position in FSLR but I am just shocked at the market's ignorance of the global tellurium supply problem.
seekingalpha.com/autho...

Oct 30 01:06 PM

[Mark Anthony:]

BTW, a potentially HUGE new tellurium demand will now start to materialize. It's called Phase Change Memory, used in computers and electronics. Commercial products have already begun to ship. Sooner or later all tellurium will be used to make such high tech computer chips. When that happens, FSLR is wiped out. Do your own DD.


On Oct 30 01:06 PM Mark Anthony wrote:

> There is NO MORE growth possible in FSLR. Not only that, at a future
> time they will have to completely terminate their solar panel business.
>
>
> Why is it so hard a concept for the analysts to accept that tellurium,
> a critical material the FSLR rely on, is extremely rare, with global
> production only a couple hundred tons, most of which is already used
> by other industrial sectors.
>
> FSLR is running out of bricks and mortar, according to Bruce Sohn:
>
>
> Bruce Sohn: "...So I'll look at capacity....our ongoing work with
> efficiency and blind run rate afford us the ability to continue to
> expand after, even in the ABSENCE of bricks and mortar construction.
> ..."
>
> It's been a very long time since they last announced the expansion
> of their new Malaysia new factory and their "copy-smart technology".
> Basically give them a piece of land and some construction money,
> they can quickly start another factory churning out solar panels
> on a 24x7 basis. And clearly they do not lack customers either. All
> their products are sold.
>
> Are they really running out of bricks and mortar to build new factories,
> or run out of land to do so, or run out of cash to spend? Absolutely
> NOT. They must be running out of tellurium.
>
> Watch the sales revenue of 5N Plus, FSLR's virtually exclusive supplier
> of CdTe. Their revenue has been flat for more than a year. nearly
> 70% of 5N Plus sales is raw material sales to FSLR. How could FSLR
> expand exponentially when it is not buying more from 5N Plus. Each
> and every question thrown at FSLR on tellurium supply has been deliberatedly
> avoided and you could never get a straight answer. When are they
> going to tell the truth?
>
> Full Closure: I have no position in FSLR but I am just shocked at
> the market's ignorance of the global tellurium supply problem.<br/>seekingalpha.com/autho...

Oct 30 01:11 PM

[Sovestor:]

Might not be the case. It might be completely the opposite.

Oct 30 01:55 PM

[Cyrus the G...:]

Very insightful Mark Anthony. Thank you.

Oct 30 08:34 PM

[Docsroute:]

All near-future PV solar residential and small to medium business installations are now adversely impacted by state and national cut-backs in rebate and other incentive programs. We just had to at least postpone solar installation at our home in Massachusetts because on October 9 the rebate program was summarily killed due to budget problems. I have heard that Germany's very robust subsidies are toat as well.

Oct 30 08:57 PM

[Anthony Alfidi:]

First Solar's business model is technologically unsustainable. There is not enough tellurium in the earth's crust to enable FSLR to survive for more than a decade or so. Mark Anthony's synopsis above is absolutely correct. Anybody buying FSLR now with the intent to hold it for more than a couple of years is throwing money away.

Oct 31 11:35 AM