Analysts Hot and Cold on First Solar

Nov. 2.10 | About: First Solar, (FSLR)
By Angus Robertson

Alternative energy bellwether First Solar (NASDAQ:FSLR) continues to polarize analysts. Third-quarter earnings of the world’s largest maker of solar panels exceeded analysts’ estimates and the company last week raised its full year 2010 earnings guidance slightly. But the company’s share price has tumbled after a couple of analyst downgrades. Nevertheless, most analysts continue to have positive recommendations on the stock.

Of 24 sell-side and independent analysts who have updated their price targets since the earnings news, five have raised their 12-month price targets, two have lowered them and the remaining 17 have reiterated theirs.

The median price target of these analysts is unchanged at $157.50, while the mean has edged up to $148.79 from $147.91. First Solar closed today at $134.44.

The range of price targets is wide: from $80 to $200. Thirteen analysts have positive ratings, 4 are negative and 7 are neutral.

Current 12-month price targets of selected sell-side and independent analysts. Click image to enlarge.

Click to enlarge

The biggest change comes from Deutsche Bank analyst Peter Kim, who cut his target from $155 to $125 and downgraded the company to Hold from Buy, as “early data points hint at declining margins.”

Likewise, Canaccord Genuity’s Jonathan Dorsheimer notes that growth appears to be at the expense of near-term profitability. Operating margin has fallen to 26.5% from 33.7% despite revenue growth of $230 million. Similarly, return on net assets, the company’s preferred metric, remains above its cost of capital and internal targets, but it too has declined to 20.4% in the current quarter from 28.2% in Q3/09. Dorsheimer reiterated his $140 target and Neutral rating.

Auriga’s Mark W. Bachman wrote that, “Core cost per watt increased slightly due to manufacturing changes made in the quarter. While this is likely a one-time event, it does mark the first time since 2Q08 that cost-per-watt increased sequentially. With increased q/q utilization and module efficiency, concern might arise that cost reduction efforts are at least stalling.” He maintained his Buy rating and $175 price target.

Macquarie’s Kelly Dougherty downgraded First Solar from Buy to Neutral while raising the target to $175 from $170. Citigroup’s Timothy Arcuri increased his target to $150 from $145 and reiterated his Hold rating. Vishal Shah at Barclays Capital maintained his Equal Weight rating and $140 price target, noting that “investor expectations went up going into the call and given the positive investor backdrop, the magnitude of beat was probably not enough, in our view.”

More optimistic is Miller Tabak’s Chris Kettenmann who reiterated his Buy rating and $190 price target:”First Solar appears well-positioned going into 2011, and we believe the company is poised for accelerated cost reductions from conversion efficiency gains,” Kettenmann wrote in a note. “We believe management is telegraphing a meaningful increase of efficiencies at scale over 2011 with continued gains through year end.”

And Cowen & Co. analyst Rob Stone said “It should not be news to anyone that solar prices have come down over time. That’s the whole idea, to get solar down to a level where it’s competitive.” Furthermore, Stone said investors should be more focused on sales volumes than margins, and applauded First Solar’s plans to boost production next year.

Come back to find out whether Deutsche Bank’s Kim is right in suggesting this hot renewable energy stock is cooling.

(Sources: Alacra Pulse, Bloomberg, StreetInsider, AmericanBankingNews, Commodity Surge, SmarTrend, Schaeffer’s Research)