First Solar's Great News...No, Terrible News...Wait...

I won't be running the world anytime soon, but in my synthetic parallel universe, all stocks would be halted for a period of time after an earnings release - whether it be 1, 2 or 3 hours - so speculators can take the time to "read" the earnings report instead of spasmodically hitting buy or sell based on a Reuters or Briefing.com headline. I'd also encourage companies to get their conference call in during this "window of information" time frame.

(that said, I'd also not let multi-hundred page spending bills pass in Congress and then have to be signed in less than a few hours, giving no one time to read it - but I digress)

I know a few people involved in First Solar (FSLR) and what a circus ride - the stock was up some 20+ points in after hours Thursday after the initial earnings report printed (right after 4 PM). By 5 PM the stock was down. Friday, it was down 10%. I realize this is all fun for daytraders but seriously - can't we move to a slightly more rational market? Are time outs not good for adults? Clearly many stocks would gap down or up even after my "time out period", just as they do now but generally they'd just gap in 1 direction once all the key information points and conference call were on full display and people had time to ... (wait for it)... analyze. But that wouldn't be fun for computers, and those high end financial institutions who run the computers - so this day won't ever come.



Let's look at what caused all the confusion at First Solar, which is (if you are not familiar with it) one of the 2 big solar companies in the U.S. Before we do, to better familiarize yourself with the situation and to give credit where credit is due (since we are almost always on the back of analysts) one of them gave a warning in May for what appears to be happening - the pressures of competition from polysilicon [May 26, 2009: Analyst - Some Customer(s) Switching Away from First Solar]

I know some solar fans still exist out there - while I am a fan of the "theme" over the long run, it is hard to get too cheery about specific companies since there is so much competition. [Jan 3, 2008: The Long Term in Solar]

.....this analyst call for First Solar (FSLR)... if you are not that familiar with solar, will sound like gobbledegook, but most of the major (and medium) sized players have technology based on polysilicon... (same idea as your computer chips). The prices in the polysilicon supply chain have been an rollercoaster causing pressure of extreme proportion to the 90%+ of public players who are on that side of the technology divide.

First Solar's process has nothing to do with polysilicon and thus has been shielded from these issues. The polysilicon bull case is eventually a glut will happen and supply/demand will come into better balance - hence cost of goods can drop through the floor allowing some serious price wars. With that said, the potential exists for many smaller to medium-sized players in the polysilicon space to also die in this war - hence the reason this sector is very difficult to invest if you care about intermediate to long-term fundamentals. Solar itself should grow quite well over time, but how much thriving can be done at an individual company level will be the question.

Recent checks indicate at least one of FSLR top customers has already switched from FSLR to a si-based module vendor for a project that is currently under construction.

So as is the order of the day - "stimulus plans" in the form of rebates were the culprit for the wild swings. Despite a very impressive outperformance, the use of rebates to stoke demand caused the consternation. This is a fancy way to say "we are cutting prices" because it does the exact same thing - and so we begin the price wars I've been warning about. Again I think solar "the theme" is a good one, and it will grow. I am not the only one - Goldman Sachs is literally (I am not making this up) buying land in the Southwest to position itself for the solar future. I am sure they will gladly sell it or lease it to companies that get government subsidies to build out solar expansions. Which they will finance. (sorry, I digress again) [Jul 29, 2008: Some Minor Solar Deals]

And probably most important, the smartest kids in the room are snapping up land quietly throughout the U.S. Southwest.

• Solar prospectors tend to be as secretive about their land as forty-niners were about the veins of gold they discovered. Most bids are placed by limited-liability corporations with opaque names that conceal their ownership. And no one has been as quick to move into the Mojave - or as tightlipped about it - as Solar Investments.
• That entity, it turns out, is Goldman Sachs’s solar subsidiary. The investment bank’s designs on the desert are a topic of intense interest and speculation. Goldman declined to comment.

But just because a "theme" is there, does not make for great investments (unless you are Goldman Sachs) - these stocks are speculative and will time to time run 100% in weeks. And then they almost always implode. Competition is fierce, and until a great shakeout occurs that levels the playing field to just a few giants, it is going to be messy. I said that in early 2008 and I stick with it. Doesn't mean you cannot trade around certain names for profit if you are a nimble speculator. But don't get "investing in solar" confused with "investing in solar companies" if you catch my drift.

As for First Solar - it has been the stud of the group, and continues to be - the question is the same as I listed above; how much the plunging cost of polysilicon will force it to sacrifice some profitability to keep up its growth curve.

AP chimed in:

• First Solar, the nation's largest solar panel maker, said Thursday its second-quarter profit more than doubled on strong sales of its thin-film modules. The results beat Wall Street expectations, but investors were turned off by a rebate program that would hurt company earnings in the second half of the year.
• The Tempe, Ariz.-based company reported net income of $180.6 million, or $2.11 per share, in the three months ended June 27. That compares with earnings of $69.7 million, or 85 cents per share, in the same period a year ago.
• Quarterly sales reached $525.9 million, almost double the $267 million reported for the same period in 2008.
• Analysts surveyed by Thomson Reuters expected earnings of $1.62 a share on revenue of $459.1 million.
• First Solar Inc., the largest solar company by market capitalization, has dropped its manufacturing costs by 6 cents to 87 cents per watt in the second quarter. It also boosted production as it completed a new manufacturing facility in Malaysia.
• The company said that despite falling prices, its gross profit margin rose to 56.7% from 56.3% in the first quarter. (just a ridiculously good standard compared to peers on the polysilicon side)

There was no guidance within the press release, so apparently they only offered it on the conference call (I did not listen so I cannot verify) but if this 20%+ reduction in gross margin guidance is true ... that shows immense pricing pressure.

• First Solar said it still expects 2009 revenue of $1.9 billion to $2 billion and gross margins of 31 to 33 percent.
• Ahearn said First Solar will push its solar panels heavily in Germany, which has some of the most generous incentives for alternative energy. The company will offer rebates for its thin-film modules that are tied to its competitor's polysilicon solar modules, guaranteeing that First Solar's modules come at a discount. "We'll do what we can to defend our position in these core markets," Ahearn said.
• Company officials estimate that the rebate program would cost between $40 million and $60 million in the second half of the year. As soon as they announced it, First Solar shares started to fall in after-hours trading.
• Mark Bachman, an analyst with Pacific Crest Securities, said a solar company has never offered a rebate like this. While it shows innovation during a tough economy, it also worries investors. "People have never seen it before and they don't know how to value it," he said.
• "We're the cost leader in the industry by a wide margin, and we're going to do what we have to do," Ahearn said, adding that the duration of the program would be "flexible" and depend on market conditions. "We're willing to reduce price so long as, but not beyond when, it's necessary."
• "They say they're doing it through a rebate program, but it doesn't matter what you call it, they still have to cut prices," said Kaufman Bros analyst Theodore O'Neill. "Their best quarter is the one they just did. The margins will only get worse from here."

More analysts pile on

• :Credit Suisse analyst Satya Kumar dowgraded First Solar to "neutral" from "outperform," saying the current quarter would "be the last good quarter for a while...we expect the stock to look ahead of this peaking earnings momentum and pull back to lower levels."
• "Concerns over channel inventory and competitive pricing from some of the lower-cost crystalline module companies seem to be weighing," Canaccord Adams analyst Jed Dorsheimer said.

And more (analysts travel in packs, much like lemmings):

• The program will most likely cut away at margins, said Deutsche Bank analyst Steve O'Rourke as he maintained his "Hold" rating, raised his 2009 profit estimate and cut his 2010 earnings forecast for the company. O'Rourke expects 2009 and 2010 profit of $7.60 per share and $8.35 per share, compared with earlier estimates of $7 per share and $8.45 per share, respectively.

Now surely there will be a price where First Solar is a good value. But this is not the type of stock known in 'value circles' - it's a high growth, momo stock. The bull case here is as a cost leader, they can somehow continue to drive their cost base down even lower - to help compensate for the plunge in polysilicon and hence the rebates won't hurt margins as much. But that is a lot of *ifs* and the marketplace doesn't like uncertainty. So for now, First Solar takes its medicine.

[May 11, 2009: Energy Conversion Devices (ENER) Results and Darker Times for the Solar Industry]

[Mar 14, 2009: NYT: Europe's Way of Encouraging Solar Power Arrives in U.S.]

[Feb 6, 2009: NYT - Dark Days for Green Energy]

[Dec 20, 2008: BusinessWeek - Clouds Over the Solar Industry]

[Jul 30, 2008: First Solar - You Cannot Stop Them; You can Only Hope to Contain Them]

No position

Comments

[Zachary Sch...:]

While the dynamics are changing for FSLR (and the margin compression is certainly disappointing), the stock still trades at an attractive multiple considering both historical and future growth. I think FSLR will end up as one of the "surviving giants" and the lower price may offer a buying opportunity.

However as you state, the volatility in these names is tremendous as evidenced by the stock now 25% below the May high, but also 50% above the March low. It may make sense to hold a reasonably sized "core" position in FSLR and then use some additional capital to trade around the position - buying fear and selling greed.

It's too soon to jump in and buy the fear after only one day of selling, but sometime in the next week or two, it probably makes sense to begin dabbling in this industry leader once more.

zachstocks.com

Aug 03 08:24 AM

[tginomorebush:]

Anal-ysts Ponzi Scheme

Aug 03 10:00 AM

[TraderMark:]

I'm with you - I just wish the lower price would be at an attractive part of the chart.

Let's see how it handles $140 if and when; looks like keys support there. Below that - not so rosy. But on valuation it is becoming more attractive. Unfortunately valuation means little in a momentum driven market where charts in uptrends are all that matters.


On Aug 03 08:24 AM Zachary Scheidt wrote:

> While the dynamics are changing for FSLR (and the margin compression
> is certainly disappointing), the stock still trades at an attractive
> multiple considering both historical and future growth. I think
> FSLR will end up as one of the "surviving giants" and the lower price
> may offer a buying opportunity.
>
> However as you state, the volatility in these names is tremendous
> as evidenced by the stock now 25% below the May high, but also 50%
> above the March low. It may make sense to hold a reasonably sized
> "core" position in FSLR and then use some additional capital to trade
> around the position - buying fear and selling greed.
>
> It's too soon to jump in and buy the fear after only one day of selling,
> but sometime in the next week or two, it probably makes sense to
> begin dabbling in this industry leader once more.
>
> zachstocks.com

Aug 03 11:37 AM

[RLLH:]

I am puzzled by why 90% of the companies use polysilicon if thin film really is cheaper. Are they protected by patents, or are they assuming they truly have a better idea than everyone else?

Aug 03 12:25 PM

[Road Runner:]

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% 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 will be $1/Watt. FSLR just stated that its 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 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 12:30 PM

[cynnatalie2000:]

A 31% gross margin will mean a profit of about 40 cents per watt or gross profit of 500 million dollars.

That would result in a net profit after tax of about 2 dollars per share per year.

FSLR will be a buy after analysts drop projected earnings to two dollars per share. Until then, the expectations are vastly different from the projected gross margin.

Aug 03 05:00 PM

[TraderMark:]

The Reuters story was incorrect - which I was thinking might be since it seemed impossible they would lose 20%+ of gross margin from a rebate. Someone came to my blog and said that was the operational margin not gross.

I am unclear why FSLR chose not to release guidance in words in the press release, rather than in the conference call. My bet is they knew the rebate would cause major consternation and their stock would be smashed for an hour before they could explain on the conference call.

Which says everything about the state of the stock market.

On Aug 03 05:00 PM cynnatalie2000 wrote:

> A 31% gross margin will mean a profit of about 40 cents per watt
> or gross profit of 500 million dollars.
>
> That would result in a net profit after tax of about 2 dollars per
> share per year.
>
> FSLR will be a buy after analysts drop projected earnings to two
> dollars per share. Until then, the expectations are vastly different
> from the projected gross margin.

Aug 03 06:53 PM

[bbqguy:]

Despite all the chatter, FSLR is a remarkably well run company making gobs of money. The other solar firms just seem like endless black-hole money-losing "wait till next year . . ." perpetual R&D firms. FSLR is so well run and is making so much money that it's hard to believe it doesn't have some pretty cool competitive strategies up its sleeve.

Aug 04 12:04 PM

[Wisdom vs. ...:]

been telling you guys this would happen for three months. FSLR's panels are low quality; now that Si has hit $1, thin film is more expensive to install. i cannot guess how low they can sell the panels and stay in business, but i can tell you that they will never get business from home/commercial installers like myself. i will be shorting this stock down to $90. if you are going to invest in solar you need to understand the difference between thin film and Si

Aug 04 10:31 PM