Shares of First Solar (FSLR) have had a terrible week. Shares of the solar company started the trading week on Monday around $34 per share.
From that point, shares slid away to $31 before the fourth quarter earnings release on Tuesday after the close. A poor earnings report sent shares to as low at $25-$26 on Wednesday, a level at which shares were still exchanging hands on Friday.
Fourth Quarter Results
First Solar generated fourth quarter revenues of $1.08 billion for the year ending 2012, up 63% on the year before. The strong performance was driven by an increase in revenue recognition of the Topaz project, as well as an increase in third-party module sales. Revenues were up 28% compared to the third quarter of 2012.
Gross margins came in at 27.3% which is down 110 basis points on the quarter, but up 6.4% compared to the previous year. Full year gross margins fell almost 10 percent to 25.3%. Despite the gross margin erosion, First Solar managed to increase operating margins by 70 basis points on strict cost control and positive sales leverage.
The company managed to cut the absolute selling, general and administrative costs in half despite the strong revenue growth. Surprisingly, the company cut research and development investments as well, from 5.7% of total revenues in the final quarter last year, to just 2.9% over the past quarter.
First Solar managed to report a profit of $154.2 million for the final quarter, of $1.74 per share on a GAAP basis. The company reported a $1.00 profit per share in the third quarter of 2012. In the final quarter of 2011, First Solar reported a massive loss of $4.78 per share on impairment and restructuring charges.
Non-GAAP earnings, which exclude $25 million in goodwill impairment and restructuring charges, came in at $2.04 per share. Non-GAAP earnings comfortably beat estimates of $1.76 per share.
CEO Jim Hughes commented on the results, "Despite a very challenging market environment, we continued to make meaningful progress in all critical value drivers for the Company. We exceeded our module and balance-of-systems cost reduction targets for 2012, as announced in December 2011, further increased module efficiency and field performance, and achieved several key objectives in our strategy to develop and service new sustainable energy markets."
For the first quarter of 2013, First Solar guides for sales of $650 to $750 million. Gross margins are expected to come in between 25% and 27%, resulting in an operating income of $70 to $100 million. Earnings per share are expected to come in between $0.70 and $0.90.
The revenue guidance implies that first quarter revenues are expected to increase between 31% and 51% on the year before.
Despite the fact that the outlook calls for decent year-on-year growth, it came as a disappointment to investors and analysts. Analysts estimated that First Solar would guide for first quarter revenues of $829 million on which the company was expected to earn $0.94 per share.
First Solar ended its fourth quarter with $1.04 billion in cash, equivalents and marketable securities. The company operates with $563 million in short and long term debt, for a net cash position approaching half a billion.
First Solar generated full year revenues of $3.4 billion for 2012, on which the company reported a net loss of $96.3 million. The company took $469.1 million in restructuring charges, severely impacting profitability.
The market values First Solar at $2.3 billion at the moment, valuing operating assets around $1.8 billion. This values the firm at approximately 0.5 times annual revenues of 2012.
First Solar does not pay a dividend at the moment.
Some Historical Perspective
Shares of First Solar trade with losses of 25% compared to February last year. After shares have lost ground for multiple years in a row, shares hit lows of $12 during summer of 2012. In the remainder of 2012, and at the start of 2013, shares continued to re-gain ground trading as high as $37 per share. From January's highs, shares have fallen back some 30% again.
Between 2009 and 2012, First Solar has managed to grow revenues by approximately 60% to $3.4 billion in 2012. The company reported large profits in 2009 and 2010, followed by modest losses in 2011 and 2012 on asset impairments and restructuring charges. Despite the growing revenues, shares are still trading with losses exceeding 90% from the highs over $300 in 2008.
Shares have lost some 15% so far in 2013 as investors overreacted on the back of a disappointing guidance for the first quarter of 2013. Investors are also concerned about comments made by First Solar's management that the second half of 2013 would be weaker than the first half. This last comment caused a lot of nervousness given the soft outlook for the first quarter.
The long term prospects continue to look good. The average module manufacturing costs fell by 5 cents to $0.64 per watt, down 7.5% on the year before. Costs did actually rise 2 cents compared to the third quarter as a result of modification of production lines. Module efficiency rates increased by 70 basis points to 12.9%, reaching new records. At the same time First Solar has demonstrated very impressive cost control and reductions over the past quarter, thereby comfortably beating consensus estimates for its earnings.
Investors are still concerned about the long term prospects for the firm. First Solar has plenty of liquidity and trades at just 65% of its book value. The strong balance sheet is actually a competitive strength given the poor financial health of the overall industry. Possible bankruptcies and reorganizations will lead to a reduction of the industry capacity, thereby improving the pricing power of the remaining companies.
Investors are also concerned about the soft first quarter outlook and the cautious comments for the full year. At its investor day in April, First Solar will issue its full year outlook for 2013 and beyond. Investors are furthermore a little worried that the order intake of $2.0 billion for the full year of 2012 came in at just 60% of reported revenues. This resulted in a lower order backlog of $8.0 billion, which still represents a respectable 2.4 times 2012's annual revenues. Yet the soft order intake should not be the greatest worry of investors as the company has structurally reduced its break-even point, notably on strict cost control in selling and general expenses.
In November of last year, when First Solar reported its third quarter results, I liked the prospects of the firm as I thought investors were overreacting to lower cash flow projections. Shares sold off to just $22 per share and have rallied more than two thirds from that point in time, peaking at $37 in January of this year.
Despite the significant sell-off so far this week, shares are still trading above the levels of the pullback in reaction to third quarter earnings. Today I reiterate my stance as shares offer value for opportunistic investors with a medium to long term horizon.