First Solar: Waiting For the Momentum to Melt

It never ceases to amaze me how during the parabolic phase of a momentum stocks run up "investors" ignore bad news and focus on what may be. Lets take First Solar (FSLR) for instance. Last week the company announced five new contracts worth $1.28 billion dollars. Bank of America analyst Eric K. Brown promptly raised his price target to $115.00 from $90.00. The AP article mentioned that as a part of the agreement there was an expansion of the existing agreement with Juwi Group of Germany. The logical question that I ask is this: does the $1.28 billion dollars include the revenue that had been previously expected from the original agreement with Juwi Group? I received no reply from the company. It's this type of detail that can make an earnings conference call turn into an inquisition of management. If an inquisition of management is necessary you can bet that the faith placed in management by Wall Street will be damaged and the stock price will suffer.

First Solar, although touted as the industry leader, is in fact a Goliath that can easily be brought down by the and coming Davids in the solar space such as DayStar Technology (DSTI), which is another thin film maker, Trina Solar (TSL) and Sun Power (SPWR) which was recently spun off by Cypress Semiconductor. Here are the "three rocks" in the sling that could easily bring down the Goliath First Solar.

1) Competition- Competition is coming and coming on strong. DayStar (DSTI) recently opened a new manufacturing facility and announced a contract with General Electric. For some time now companies that relied upon silicon were at a disadvantage to companies like First Solar and DayStar, as they didn't use siliconto produce their products. The shortage of silicon is expected to be resolved by the end of the year, thus entering into a new era of price wars to grab market share.

2) Margins- First Solar has the one of the smallest margins of all solar companies. As competition increases so will the pressures on margins. Currently, their profit margin is 7.91% as opposed to profit margins of 30.8% by LDK Solar Co. (LDK). Most of First Solar's revenue comes from Europe where they are dependent upon a cheap US Dollar to keep profit margins as wide as they are now. The $1.28 billion dollar figure recently announced was based upon a currency exchange rate of 1.30 Euros per US Dollar. The USD is currently at multi year lows and is near a major support level, which in past years has acted as the spring board for a major rally in the US Dollar. It's important to remember that the revenue expected is spread over the course of five years. A stronger US Dollar will torpedo the already thin profit margins of First Solar. Not only will a stronger dollar have an effect on sales expected to convert to US Dollar over the coming five years it will also make products from European competitors that much cheaper which should effect the sales growth of First Solar. If the U.S.Federal Reserve does raise rates as widely anticipated later in the year you will see the U.S.Dollar rally and stocks which rely upon international sales suffer. First Solar is heavily relent upon foreign sales and vulnerable to a currency squeeze.

3) German Subsidies- First Solar does most of it's business in Germany and it was reported this past week in Barron's that the German environment minister announced that there would be a cut in further subsidies to solar companies. The only analyst who appeared to have received the memo was Steven O'Rourke of Deutche Bank who's downgrade and $90 price target was ignored on Wall Street.

Although the reason was not specified in their release, Lazard Capital also announced a downgrade of the stock along with Argus, who issued a sell rating and a fundamental trading range of $62 - $77 per share and a top end valuation of $88.00 per share was also ignored.

Hyper stock price growth fueled by short squeezes is no way to invest. It's been my observation of momentum stocks like First Solar that hyper confidence leads to hyper indecision like we saw last Tuesday to Friday and then to hyper fear as down volume soars and support levels are broken. Caution, a yellow warning flag has been thrown on the track.

Disclosure: Author has a short position in FSLR

FSLR 8-mo chart

Comments

[robert1:]

What is your opinion of Nanosolar as a competitive threat?

2007 Jul 17 08:06 AM