Avoid the Solar Bears and Invest in First Solar

Hopefully the solar bears have had a chance to bask in the sun this year, because for the most part the solar industry has been abundant with dark clouds. First Solar (FSLR), the industry leader in low cost manufacturing, has held up fairly well for the most part, but in another regard, the stock is underperforming what one might expect after consistently blowing away estimates.

For Q2 ending June 30th, the company reported earnings of 2.11 a share versus expectations of 1.62. In the prior quarter, First Solar reported earnings of 1.99 versus expectations of 1.50. This has been consistent with the trend for the past year where the average surprise in earnings has been 26% higher than analysts’ estimates. In an economy where CEOs and investors alike may find it better to set low hopes and expectations as to avoid the disappointment on the horizon, it may be a factor in corporations persuading analysts to keep forecasts low. Apple (AAPL) sandbags every quarter and it seems that analysts fall for it over and over. Then earnings come in far beyond what was forecast and we’re left scratching our heads when the company reiterates a conservative forecast.

Given the hurdles CEO Mike Ahearn stated in the conference call - concerns about installation capacity, working capital and construction financing, long lead times, and project deferments - it would be quite easy to buy into the doom and gloom scenario and calculate an estimate based on the company maintaining its guidance till year end. However, with the company consistently blowing away earnings, one may be inclined to rethink what they’re forecasting.

By token of the action in the stock price, analysts certainly believe in the solar apocalypse. After initially rising to as high as 193 in after hour trading, during the conference call the stock began to plummet, and this continued into the morning reaching as low as 155 a share. Analysts have stated the rebate program will have an impact on margins, and revised forecasts for 2010 downward.

Before outright believing in the solar bear scenario, let’s crunch out what First Solar seems to be forecasting: revenue in line with original year’s guidance of $1.9 to $2 billion - let’s take the middle road and go with $1.95 billion. With $418 million and $525 million already reported, we’ll split the remaining billion or so as $500 million for Q3 and $507 million for Q4. Cost per watt came in 6 cents lower or a 6.5% percent decrease from Q2; however, CFO Jens Meyerhoff warns “Cost per watt produced is expected to decline at a more moderate pace in the second half of 2009 as the ramp up of our Malaysia factory is substantially completed.” So let’s slow it down to a decrease of 5 percent and assign 83 cents per watt for Q3 and 79 cents for Q4. Based these factors First Solar would net $179 million for Q3 and $191 million for Q4. However, as mentioned on the conference call, First Solar is now offering a rebate to compete with the reduction in cost for competing silicon. The cost of the rebates is estimated to be in the range of $40 to $60 million. If we assume the middle ground with $50 million and reduce each quarter's net gain by $25 million, we are left with $154 million or $1.80 a share for Q3 and $166 million or $1.95 a share for Q4. Not too shabby compared with last year's earnings of $1.20 and $1.61.

I believe this is a fair way to assess what we can look forward to for the remainder of 2009… and as for 2010’s outlook, despite the dismal tone pervading the conference call, there were glimmers of optimism Mike Ahearns alluded to going forward: “So there is some generalized concerns here. I mean if we compare where we sit today to where we were last quarter and the quarter before, we would say it is generally it is more favorable. On the other hand, we expect to drive a lot of higher volumes here in the second half in Europe, that will be a test.” There’s also progress being made in government subsidies providing grants and loans for renewable energy projects as part of the stimulus package, as well as speculation China subsidies going into 2010 will offset inventory gluts. This would bode well for First Solar as it would reduce the margin pressure the company “projects” —and I emphasize “projects” because gross margins actually improved this quarter from 56.4% to 56.7%.

I’m sure the polar bears in the arctic would prefer the dark clouds instead to keep the sun off their melting ice. And as for the solar bears… those dark clouds spell profit for their short positions. All told, however, First Solar has had the ability to sustain a gross margin in the 50% range despite falling prices on silicon, and they continue to blow away earnings forecast after forecast. This is a great buying opportunity.

Disclosure: Long FSLR, AAPL

Comments

[Mad Hedge F...:]

I like it. For the latest news from the front trenches of the solar industry,listen in to the all day analyst meeting given in Las Vegas by FirstSolar (FSLR) by clicking here. If you don’t want to wade through six hours of data that could onlyarouse a bachelor engineer, here are the highlights. The headline isthat the cost of solar is now down to ten cents per kilowatt hour,versus three cents for coal. But the Clean Energy Act of 2009 iscertain to make solar cheaper and coal more expensive. The industrywill face a completely new set of challenges gearing up from a fewrooftop panels on environmentalist rooftops to becoming a major portionof the US power supply. For a start, solar energy is most abundantwhere there are no people, because these areas were uninhabitable untilair conditioning came along. That means building a huge network ofpower lines from scratch, something that will require Federal EnergyRegulatory Commission (FERC) shepherding. Unlike other power sources,solar is highly variable, hour by hour and even minute by minute. Not aproblem when you are running a freeway sign, but a big problem whenrunning a large regional network, so “smart” grids will be the order ofthe day. The technology to do this on a large scale hasn’t even beeninvented yet. The ongoing credit crisis is a major problem, since onegigawatt of capacity will cost $800 million in capex. Nevertheless,this industry now has a huge global tailwind and should remainpermanently on your radar. Consider FSLR on the next big dip. For more,see my earlier piece .

Jul 31 04:50 PM

[nmelendez:]

I'll stick with Sunpower (SPWRA). Much greater growth with less dangerous REE materials. (Tellurium)

Jul 31 09:26 PM

[jerrydd:]

The problem with solar is not it's varying output but the solar farm model with it's high land, transmission line costs and low income rates.

Compare this with home, small business units where there is no land, powerline costs and these customers pay, thus save much higher rates. This makes their payback much lower, about 50% of a solar farm model and almost pure profit after that.

Plus the added home value and the fact that rates are only going up is more income/savings .

So the solar panel companies who want to survive need to lower retail costs of panels to under $2/wt and package them in plug and play kits with inverter and mountings included for under $4/wt.

Why is this market is huge, many times the size of the solar farm model. But panel costs of over $4/wt and high install costs have kept it small. Remove those barriers and a sweet market is there that is close to unlimited for at least 10 yrs.

Aug 01 10:47 AM

[jerrydd:]

I forgot to add

The problem with solar is not it's varying output but the solar farm model with it's high land, transmission line costs and low income rates.

By having a wide area of solar panels instead of them in one spot like a solar farm then their variations even out producing a steady average output. Same for wind.

Aug 01 10:51 AM

[Fred W:]

FSLR is NOT the safe play that "most" seem to think. FSLR is approaching the output capacity that will ultimately drive up the cost of its raw materials. CdTe--generally only found as "extras" in the mining processes for copper--methods are changing in such a way that the "extras" will not be part of the process anymore.
The train is coming down the tracks--"visually" a long way off but you, really can't judge the speed of a train from the tracks--might be moving a lot faster than it appears.

Aug 01 11:10 AM

[LightnRod1:]

I think FSLR has lots of down side risks.

Polysilicon-based panel makers are beginning to sell their products cheaper on a per-watt basis than thin-film panel makers (eg FSLR). Polysilicon based solar could replace thin-film solar over the next few years. FSLR is at risk.

Aug 01 04:04 PM

[Bob55:]

I have a differing assessment of solar. Wind requires wind farms and lots of land. Solar, on the other hand, can be quite efficient on rooftops on buildings and houses. Imagine what can be achieved with solar panels on every building in every metropolis in the world.

As for betting against FSLR, I only have to say U.S. solar companies have yet to pop. Just waiting for solid developments should they occur in U.S. energy policy. If it does, American companies, FSLR included among them, should benefit greatly so betting against them may not be the wisest move.


On Aug 01 10:51 AM jerrydd wrote:

> I forgot to add
>
> The problem with solar is not it's varying output but the solar farm
> model with it's high land, transmission line costs and low income
> rates.
>
> By having a wide area of solar panels instead of them in one spot
> like a solar farm then their variations even out producing a steady
> average output. Same for wind.

Aug 01 09:15 PM

[tedster98:]

Made made Global warming is a farce with plenty of scientists to back it up.

Fact is, the earth has been a lot hotter in the past. A 1% increase in solar output can have a 100% effect on climate. Being an amateur astronomer and a student of astronomy for over 2 years, I know a little something about the subject.

I laugh at people who buy into this junk science. The real danger is the ignorant politicians who foist this garbage on uneducated voters.

As far as solar energy stocks go, sure fine, buy 'em if you want to, but they ain't worth a plug nickel while oil prices are down.

If you want to buy solar devices for the house, sure that's ok too - in the long run it may pay off, but I don't see it profitable in the short.

Aug 02 03:41 AM

[Bob55:]

The question is what percentage of the world's scientists believe Global Warming is a farce? If even 5% can claim this, you would prefer to ignore the 95% who say it is a grave problem that has to be addressed now.

While you contend the Earth has been hotter in the past, few can question that carbon emissions in the atmosphere trap heat and is a huge source of pollution. Yes, the Earth may have had its cycle of heating and cooling in the past, but it's never had to contend with what mankind and what it has been doing to this world.

While there is a worldwide effort to address this issue, the U.S. has yet to scratch the surface when it comes to doing our part. Who knows whether this will change or whether it will be business as usual? I know there's many out there who would just be happy if we stuck our heads in the sand and pretend this problem never even existed.

Aug 02 09:51 AM

[Bob55:]

Just correcting a typo -

"Yes, the Earth may have had its cycle of heating and cooling in the past, but it's never had to contend with mankind and what it has been doing to this world."

Aug 02 09:55 AM

[tessant:]

I'm staying with the chinese walmart of solar - stp.

Aug 02 11:07 AM