Recently, shares of First Solar (FSLR) took a hit after the company announced a stock offering, which it closed on Tuesday. In the end, First Solar raised nearly $428 million, which will provide the company with a nice chunk of change. Today, I'll break down the deal, and discuss why the hard part now comes. That is, First Solar has to make this money worth the dilution to existing shareholders.
The deal - overall information:
First Solar originally offered to sell 8.5 million shares of stock. In the end, underwriters exercised their over-allotment option, adding another 1.247 million shares to the deal. In total, First Solar sold 9.747 million shares at $46.00 per share, receiving net proceeds of $427.7 million. According to the press release, the company will use the funds for the following items:
First Solar intends to use the net proceeds from the offering for general corporate purposes, which may include acquisitions of under development photovoltaic solar power system projects, investments in photovoltaic solar power system projects that will be jointly developed with strategic partners and capital expenditures or strategic investments to develop certain business units and expand in new geographies.
In the end, First Solar shareholders will face a significant amount of dilution. According to the most recent 10-Q filing, the company had approximately 87.62 million shares outstanding as of March 31, 2013. That means that this equity deal will dilute shareholders by roughly 11.12%, meaning one extra share for every 9 shares that were already out there. This isn't a small amount of dilution. To put this in perspective, analysts were expecting $4.22 in non-GAAP earnings per share this year (as of last week). Given the same level of net income, that could mean roughly $3.75 in earnings now, thanks to the added amount of shares. Of course, this assumes the increased level of share count for an entire year. This deal won't be as dilutive for this year because the first five months of the year had the lower share count. But you get the idea in theory on what kind of impact this will have.
Good timing or bad?
You might wonder whether this was a good time for First Solar to raise these funds, or whether the company was a little off. Before I get into the discussion, let me show you a five year chart of the stock.
(Source: Yahoo! Finance)
First Solar no longer trades at the $300 plus level that it once did. Right now, it trades for less than half the $100 it did about two years ago. However, you have to consider that on June 4th, 2012, a little more than a year ago, this stock traded for just $11.43. The fact that it got $46.00 a share in this deal seems like a win for the company.
But consider this other fact. The company announced the offering after the bell on June 11th, last Tuesday. That day, the stock closed at $52.29, and dropped the following day to $46.66 over concerns about dilution. The deal ended up at $46.00. But one day before it announced the deal, Monday, June 10th, the stock closed at $56.40, its highest close in a couple of years.
So the stock dropped more than $4.00 right before the announcement. You might find that suspicious, but I'm not arguing that here. In fact, the S&P 500 (SPY) was down about a percent that day. So when you consider First Solar as being a more volatile name, plus the large rally, it seems natural that on a down market day the stock could drop a couple of bucks.
But my main point is about the deal in general. Could the company have announced it one day earlier? If that had happened, what would the deal price have been, $48.00 to $50.00 maybe? For this argument, let's use $49.00 as the number. Given the same number of shares (and over-allotment) and roughly the same deal expense, First Solar could have had another $29.2 million. Nearly $30 million could go a long way, and it is about 7% more money than what it got.
Let's also look at it from the other angle. Assume for a minute that the company raised the same amount of money in total, but keep the deal at $49.00. At that price, this deal would have been roughly 600,000 shares less. It might not seem like much on a 9.75 million share deal or for a stock with 87.6 million shares outstanding, but it is a decent chunk. Remember, this company has a rising share count as executive options are exercised, meaning investors are already being diluted each quarter. An extra 600,000 shares makes a difference, especially when (more like if) this company gets to a point where it is buying back stock. The 600,000 share number might not seem like much, but over time, it could add up when you think about earnings per share.
Impact on the balance sheet:
Obviously, raising money, whether through debt or equity, is going to have a huge impact on any company's balance sheet. As First Solar went the equity direction, it will "improve" the balance sheet in a sense because items like cash and working capital will improve. Also, certain financial ratios that include debt and other liabilities will "improve" because there was no addition to debt or any liability category. The following table shows some key financial ratios for the company at the end of Q1 over the last three years. Dollar values are in thousands. The cash and investments balance below includes cash and equivalents, short-term marketable securities, and long-term marketable securities, but does not include any restricted cash.
Some of the financial ratios got worse during late 2011 and 2012 as the company struggled, which is why you saw the stock price drop so much. Over the past year, the company's cash balance has improved nicely. This is due to some shifting of current assets. A year ago, the company had $1.45 billion in trade and unbilled receivables plus inventories. At the end of Q1 this year, that was down to about $1.15 billion. Turning receivables and inventory into cash is always nice, as it makes the balance sheet look a little cleaner. The company also reduced its debt nicely. The only negative above was the decline in working capital and the current ratio, as the rise in current liabilities outpaced the rise in current assets.
Now in the following table, I'll show you the changes after the company received the money. Obviously, we don't know how Q2 has fared, so I will leave every balance sheet item constant that I can. I will add $427.7 million to the following categories: cash, current assets, total assets, and equity.
Wow, things look so much better! This is what happens when you raise equity. It will be interesting to see the Q2 balance sheet when it comes out, to see what has really changed. I wouldn't be surprised to see some of this cash being put into some short-term marketable securities, so at least the company can earn some interest. Because the deal was closed with just two weeks left in the quarter, I don't exactly expect that the company will go out and buy a ton of inventory or assets with the money. That will take time, although it's possible that it already bought some this quarter. I know that the company did not state this in the release, but I'd like to see it pay off some of its liabilities or debt. The company didn't say that it was going to use these raised funds for that, but it had a sizable cash balance at the end of Q1. Remember, the company has more current assets than current liabilities, and more total assets than total liabilities. That means that paying off debt and other liabilities will make some of the financial ratios (current ratio, liabilities/assets, etc.) better. Even paying off $25 million of liabilities or some of the $300 million revolving credit facility can make a difference.
Now the results have to come in:
The solar giant has a lot to prove with its stock soaring since the company set an aggressive target for 2013 revenues and earnings per share. First Solar guided to revenues of $3.8 billion to $4.0 billion and EPS of $4.00 to $4.50, far above a consensus of $3.15 billion and $3.46. That sent shares up nearly 50%, and they've rallied even more since then. However, when the company reported Q1 results, earnings per share missed despite a solid revenue beat. Analysts were a bit concerned with the company's margins. The day before that aggressive guidance, the stock closed at just $27.04. It would more than double after that, before pulling back last week.
First Solar is a very seasonal business, and that leads to large rises and falls in both revenues and earnings. Estimates for Q2 revenues stand at $751.23 million, which would be a 21.5% drop from last year's $957.33 million. At the same time, Q2 earnings per share (non-GAAP) are forecast to drop from $1.65 to $0.58. But in Q3, revenues are expected to jump by 29% over the prior year period, with earnings expected to be roughly flat. For the full year, revenues are expected to rise by 13.7% to $3.83 billion, while earnings per share are expected to drop from $4.90 to $4.18. Analysts expect the large drop in earnings primarily thanks to the poor margins we saw in Q1. However, analysts have certainly raised their numbers, as the $3.83 billion and $4.18 respectively are much higher than before the company issued such aggressive guidance.
First Solar closed at $47.69 on Monday, May 6th, the day that it reported earnings after the bell. So shares are down almost two dollars since then, although they had a $10 rally after earnings. Remember though that this stock was at $11.43 just a year ago, and with the increased guidance, First Solar will need a good quarter to justify the share price rise. As you can see from a running tally of the company's earnings results, the company has had trouble in recent quarters beating on both the top and bottom line.
Short interest will be impacted:
You can bet that there will be some interesting moves in First Solar's short interest over the next couple of updates. The table below shows short interest from February 2012 to May 2013.
The end of May 2013 short interest number, 15.4 million, was the lowest count since February of 2012. Don't forget, since that time, the outstanding share count has risen by more than 1.15 million shares. First Solar short interest is down almost 52% since the high we saw in August of 2012 at nearly 32 million shares. At that point, roughly 36.64% of the outstanding share count was short. At the end of May 2013, that number was down to 17.57%. Short sellers have certainly covered, and that's one reason why the stock has rallied so much.
It will be extremely interesting to see how short interest fares over the next few updates, as you have a number of competing forces. On one hand, the nearly 10 million additional shares outstanding means more shares can be shorted. Does the short count rise as investors worry about dilution, lower earnings per share, and the fact that the company is selling stock? On the other hand, the company has more cash to operate the business, and can look for more solar projects to increase revenues. Also, the stock has come down about $10 from its recent high. Will shorts take the opportunity to cover? We will see over the next couple of weeks.
First Solar - the momentum bubble:
First Solar is grouped with the momentum names, stocks that have been very volatile in recent years and generate a lot of debate. These stocks rise and fall quickly, and have made and lost investors lots of money. First Solar has been grouped with names such as Netflix (NFLX), Green Mountain Coffee Roasters (GMCR), SodaStream (SODA), and now even Tesla (TSLA).
Recently, the momentum names have been back in favor, and these stocks have rallied strongly in 2013 and from their multi-year lows. A couple of weeks ago, Tesla used its rally to raise funds through debt and equity, and that stock has fared well since then. Tesla was able to pay back its DOE loan, and the stock is around $103. Three months ago, Tesla was at $35. I've detailed today how First Solar used its rally to raise some money through equity. At this point, I don't see Green Mountain doing the same, because the single serve coffee giant is actually in the process of a $500 million stock buyback program. SodaStream has rallied strongly on analyst upgrades and buyout rumors, so maybe it will be the next one to issue equity. There also have been many calling for Netflix to issue equity, to pay for some of its debt and increasing mountain of content liabilities. Since Netflix has gone from $53 to $230, it might be a good time for that company to issue equity without too much damage. Netflix's rally is comparable to First Solar's rise from the low teens to the equity raise at $46.00.
Unfortunately for First Solar, it remains the worst performer of this group from its pre-crisis highs. The table below shows each name's pre-collapse high, how much it fell to the low, and how much it has rebounded. I have not included Tesla in this table because that company has only been public for a few years and didn't have the huge fall that many of these other names did.
*Green Mountain hit an after-hours low just above $15 after one quarterly report. These are intra-day trading prices.
First Solar, like Netflix and Green Mountain, are up more than 300% from their low point over the past year or so. First Solar had been the leader in the "rebound" category when it traded above $56.00 recently, but has lost that position on the pullback. But the important number is the "from high" line at the bottom. SodaStream has recovered most of its losses, while Netflix and Green Mountain are getting there. First Solar is a world away from where it was, and it could be years (if ever) before the company gets back to its high.
First Solar raised more than $427 million through a sale of its shares. This has bolstered the company's balance sheet for the time being, but has diluted current investors by more than 11%. The company may have been slightly off on its timing. This caused the company to either not raise as much cash as potentially possible, or have an extra amount of shares to be sold. First Solar closed the deal at $46.00, more than 12% lower than where shares traded before the announcement of the offering.
First Solar now needs to prove that the money raised can be put to good use. Shares are up roughly 70% since the company set aggressive revenue and earnings guidance for 2013, so expectations will be high. The company has to deliver, and that starts with a Q2 report expected to show huge drops in revenues and earnings.
For the time being, I think shares are likely to remain fairly stagnant. You will have some buyers coming in after the $10 pullback, but they might be offset by an increasing amount of short sellers. I consider this name a short candidate at this point, because of the dilution and the company needing to prove that results justify the rally. I wouldn't necessarily short it just yet, because of the recent pullback, but it might be something to consider if we get a pop back into the mid or upper $50s. For now, it remains on the short candidate list as one to watch.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.