First Solar's Reversal After Earnings Is Hard to Understand

That was some reversal in First Solar (FSLR) on Thursday after hours! The stock ran up to over $190 following the headline results of the quarter in which the company absolutely destroyed estimates, but reversed sharply after the company revealed pricing pressure and financing constraints in Germany. (Call Transcript)

Frankly, I don’t understand the magnitude of the reversal after hours with the stock now down about 4% from the close. Granted, Germany is an important market, but the company didn’t change its revenue and gross margin guidance for 2009 and is sticking with $1.9 – 2 billion and 31 – 33% respectively.

In addition, they expressed optimism over the French market which they are positioned well for with the EDF partnership. It seems like an over reaction in my opinion.

Here are some highlights from earnings presentation which you can view here

• all Malaysia plants at full capacity (increased shipping volumes from plant 3 and 4)
• efficiency up just a bit at 10.9%
• manufacturing cost down to .87/watt, a 6% decrease over the year ago quarter
• gross margins up .4% over year ago quarter

Germany

• crystalline silicon oversupply
• deferred investments due to anticipation of further pricing pressure
• project debt constraints and delays
• financing constraints
• duration of these constraints are unknown but could be temporary
• rebate program enacted to spur demand where cost is the constraint

France

• great potential
• strong political leadership committed to renewable energy as highlighted by Grenelle
• wants be a leader in solar market

Regarding the EDF partnership:

• positions company for larger share of French market over time
• solidifies relationship with key customer
  

As of Friday morning, analysts have been, for the most part, negative on First Solar which is why the stock continued to slide in pre market trading. It has stabilized though and holding steady in the 155 – 157 range. I wouldn’t be surprised to see a retest of the 150 before this is all said and done, particularly if this market ever goes into a meaningful correction. That would provide another great place to add a long term position in my opinion.

Credit Suisse downgraded – Outperform to Neutral

ThinkEquity downgraded – Buy to Accumulate.

Wedbush Morgan is the only positive so far with a lifting of the price target from $170 to $195 and a reiteration of the their Outperform rating.

Disclosure: Long FSLR at 149.90 and 167.50 (added shares after the bell Thursday)

Comments

[Trey Jarmond:]

Dude, the stock has had an amazing run, it's now facing overhead ristance... stock 101

Aug 02 10:42 AM

[Tate Dwinnell:]

Thanks for the lesson, but I see it differently.. guess that's what makes a market eh? Perhaps you and I are looking at different time frames or charts for that matter. The double bottom breakout of 4/30 remains intact.. not too concerned unless it takes out the 140 level.

Aug 02 11:25 AM

[Jigar Shah:]

The thing that the market is reacting to is that there is still an underlying preference in the downstream channel for crystalline solar products over First Solar's thin film. If the price benefit for FSLR has gone away then people on the margin will move to crystalline. To counteract this, FSLR will provide rebates in a targeted -- we will see how much is enough. This argument is not about the strength of FSLR, this is about where their margins will be in 2010.

Aug 02 12:00 PM

[Tate Dwinnell:]

Good comment Jigar.. you're right on about the fundamental picture. It's the million dollar question. I still think the reversal was a bit of an overreaction, but of course the market doesn't care what I think. The action on Monday will be telling.. can it stem the bleeding?

Aug 02 12:20 PM

[Derreck:]

Jigar,

I had reached a similar conclusion up to the earnings annoucement. Part of my thoughts were that news about subsidies from China should not be taken lightly. This will further bring pricing pressure and they will have to figure a way to combat that 2010-2013. My valuation puts the stock around $138, but could go lower.


On Aug 02 12:00 PM Jigar Shah wrote:

> The thing that the market is reacting to is that there is still an
> underlying preference in the downstream channel for crystalline solar
> products over First Solar's thin film. If the price benefit for FSLR
> has gone away then people on the margin will move to crystalline.
> To counteract this, FSLR will provide rebates in a targeted -- we
> will see how much is enough. This argument is not about the strength
> of FSLR, this is about where their margins will be in 2010.

Aug 02 01:20 PM

[Traveler 1:]

FSLR projects down to $132 on friday's action; However I don't think it will go that far. They have the right product design and the company is well managed. This will be a good buying point.

Aug 02 02:52 PM

[Mad Hedge F...:]

dI'll buy it here as a call on crude. 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 .

Aug 02 03:52 PM

[tc1:]

I think Barron's, especially, among other financial media, has poisoned the well on First Solar-- one negative piece after another over the last several months. Such a background of "naysaying" can bring in uncertainty in the minds of many big investors and they heavily oversell FSLR at the very suggestion of anything amiss in FSLR's near-term or long-term future.

I've seen FLSR's price yo-yo up and down so much that i almost suspect the stock has become a "trading vehicle" for certain big investors (especially short-sellers), and so there's a lot of effort to deploy the financial media to pump it up fast and then bring it down hard.

Just musing here, but, as evidence, just review the wild price-swings of FSLR over the last 15 months: over 300, down to 80, up to 160, down to 100, up to nearly 200, down to 140s, up to 190s, down again...... There is massive speculation going on around this stock, not helped by the credit crisis, bearish-bullish market speculation, and, last but not least, wildly swinging oil prices --with which FSLR's price often shows a direct correlation.

Among various people posting online or in print about FSLR, one hears everything from "this is by far the best company in the solar sector" to "this is a coming trainwreck of a company."

It looks like FSLR is doing everything right, but there's so much cacophonous noise about this sector-leader that investor confidence is often shaken over both its imminent and long-term future. Hence the schizophrenic price-action on the stock.

Jigar Shah's point is well-taken about people preferring silicon-based technology as silicon's price comes down. One concern for a number of investors is that silicon PVs, beyond their obvious greater efficiency, also have proven longevity, whereas FSLR's cadmium telluride thin-strip panels don't (yet, anyway) have that proven long lifespan.

Aug 02 04:57 PM

[Tate Dwinnell:]

There are quite a few "i told you so's" out there on FSLR as if to say they knew the stock would reverse $40 bucks following what was a very impressive quarter (which seems to have been thrown out the door). Granted, it's all about the future with stock pricing and the Germany uncertainty has given traders the jitters. What seems to be missing in ALL the analysis I have seen so far is the possibility that maybe, just maybe.. silicon prices prices recover quickly and the cost advantage is restored. Perhaps it's the same people who think that oil won't ever get over $100 again.

Aug 02 06:48 PM

[tc1:]

Tate, that's a really important point you've brought up about the possibility of silicon's price going back up. Does anyone know of a good source(s) on this topic? And, of course, a major issue on this line of investigation is the time-frame-- if silicon's possible rise in price is too far out ahead in the future, it won't help FSLR's price in the near- to medium-term.

In any case, we can all be thankful for FSLR's presence-- whether on not one invests in it (long or short), it has really raised the profile and popularity of the solar sector.

Disclosure: formerly long on FSLR (bought at $133), sold for a profit; waiting for a possible good re-entry point. Big fan of FSLR's being the sector leader on taking eco-responsibility for the entire lifecycle of its products.

Aug 02 07:17 PM

[nmelendez:]

I still like Sunpower better. Even CSIQ has a ways to run, put pricing will put downward pressure now that there are so many players.

Aug 02 07:26 PM

[Tate Dwinnell:]

Here's a good article on polysilicon pricing which has plummeted:
blogs.wsj.com/environm.../

If in fact this economy has bottomed out, which many believe it has, can it be safely assumed that silicon prices have as well? If so, then so has FSLR's cost advantage. With the price of other commodities as our guide (with the exception of nat gas) that may very well be the case.

Aug 02 08:12 PM

[Jigar Shah:]

This is unlikely to happen (silicon price rebounding beyond $80/kg)
1) Poly mfgs built their plants assuming $55/kg pricing so they can afford today's prices
2) Top 10 Mfgs have more capacity in the pipeline that will be completed
3) Respected new guys like PV Crystolux, etc want to join the game so they won't slow down
4) Silicon efficiency will get better over the next 3 years in terms of thinner wafers and recycling silicon sawdust from water cooled diamond wire saws

We have at least 2-3 years before silicon goes above $80/kg on a sustained basis. The bigger point is I really don't think silicon will go below $45/kg because the big 10 have such good balance sheets that they can afford to just put silicon into inventory for the next 4-5 years and don't want to go down to variable costs like they did in 2002. Also the Chinese mfgs are at $80/kg for their costs so there is no reason for the top 10 mfg to go lower than $45/kg.


On Aug 02 07:17 PM tc1 wrote:

> Tate, that's a really important point you've brought up about the
> possibility of silicon's price going back up. Does anyone know of
> a good source(s) on this topic? And, of course, a major issue on
> this line of investigation is the time-frame-- if silicon's possible
> rise in price is too far out ahead in the future, it won't help FSLR's
> price in the near- to medium-term.
>
> In any case, we can all be thankful for FSLR's presence-- whether
> on not one invests in it (long or short), it has really raised the
> profile and popularity of the solar sector.
>
> Disclosure: formerly long on FSLR (bought at $133), sold for a profit;
> waiting for a possible good re-entry point. Big fan of FSLR's being
> the sector leader on taking eco-responsibility for the entire lifecycle
> of its products.

Aug 03 12:25 AM

[maverick21:]

Since the portents were extremely positive, I bought some shares before earnings were announced @168, thinking that there would be a major gap up post earnings. Any possibility at all that prices could rally this week? Or has the trend turned sour for sure?

Aug 03 02:21 AM

[Road Runner:]

Here is my repost from another blog.

I find the rebate program very troubling. It signals a permanent trend in the solar world. Polysilicon companies are going to continue to lower their cost and thus their prices, putting even more pressure on thin-film companies like Firstsolar (FSLR).

Half the cost of the solar system is installation, so FSLR 10.9% efficient solar systems are much larger for the same energy output as a SunPower (SPWRA) 22.5% efficient systems. Thus the installation cost (and to some extent, shipping costs) of a FSLR energy equivalent system is much higher than a Sunpower system.

Sunpower announced that by 2014 (only 5 years) they will be selling 25% efficient solar panels. Their manufacturing cost is $2/Watt now, and will be $1/Watt by 2014. FSLR’s manufacturing cost is now $0.87/Watt. I’m sure that FSLR will continue to lower its manufacturing costs, but there is a limit where installation costs start to dominate system costs making the price of the solar panels less important. What FSLR needs to do is increase efficiency dramatically which doesn’t seem to be in the works.

Sure, integrating solar into building materials like glass and shingles will mostly negate installation costs, but I don’t believe (correct me if I am wrong) that FSLR’s technology of CdTe (Cadmium and Tellurium) is suitable for integrated building materials because Cadmium is highly toxic.

One more factor is that European banks are hesitant to loan money for thin-film solar systems. Thin-film is a new technology that is not proven over time. In other words, the banks don’t know the true lifetime of a thin-film system. Whereas, polysilicon solar systems have been around for decades and have a very good track record for long life, 20 years plus.

I doubt that FSLR will remain a high flying growth stock now that that the rebate program has left no doubt that the polysilicon solar companies are putting pressure on FSLR.

I sold all my FSLR stock today because of this news, and the fact that FSLR shares are fully valued, in my opinion, because of the huge amount of praise and hype surrounding this stock. It’s time to move on to the less loved polysilicon solar stocks.

Aug 03 05:48 PM

[mkreisel:]

Price wars are ugly.

NFLX and BBI squared off between 2004 and 2007, and NFLX shareholders were in some really rough rides. But at least NFLX came out victorious.

In price wars with no clear winners, such as the DRAM business from 1996 until very recently, MU's chart is very instructive.

Aug 05 06:20 PM