Net income for the second quarter of fiscal 2007 was $44.4 million, or $0.58 per share on a fully diluted basis, compared to net income of $5.0 million, or $0.07 per share on a fully diluted basis for the first quarter of fiscal 2007 and a net loss of $2.5 million for the second quarter of fiscal 2006 or $(0.03) per share on a fully diluted pro-forma basis. Net income for the second quarter of fiscal 2007 includes a one time income tax benefit of $39.2 million, or $0.51 per share on a fully diluted basis, resulting from the reversal of valuation allowances against previously established U.S. deferred income tax assets.
While the operating net income was just $0.07, it was still far better than the $0.03 consensus. Furthermore, while the tax benefit was theoretically a one-time event it was good news for two reasons. First and most obvious was the $39.2 million tax benefit. Second was the reason the company reported the benefit. Deferred tax assets arise when the company loses money and has negative taxes due. The company does not receive a refund but can offset future profits with the tax credits as long as it earns the income before the credits expire. Since that can be in doubt, companies must take a valuation allowance for the possibility that they will not earn sufficient future income to claim the credit. By reversing the allowance, the company is essentially raising their long-term earnings guidance.
But neither beating the earnings number nor raising their long-term guidance was enough to satisfy a newly risk-averse market, and shares traded off sharply after market hours. The current euphemism for this is that the market is “repricing risk.”
You see, there is no way to know for sure exactly how much First Solar is worth. Its current earnings are worth somewhere between $5.00 and $10.00 per share. The other $100 per share or so is what the market is willing to pay for growth. Since nobody really knows how much the company will grow, the “true value” of First Solar could be $20, $100 or even $1,000. Up until last week investors were willing to pay $110 in hopes that the true value was higher. Now that the year/year growth is only triple instead of quintuple they think the odds of it being worth more than $100 require a little extra return to compensate for the volatility. To get a little extra return one has to start with a lower price.
And that is what the pundits mean when they tell you the market is “repricing risk.” Most people call it repricing stocks. Last week I was surprised that investors didn’t reprice by as much as I thought they might. Now it looks like it may simply have been a delayed reaction.
FSLR 1-yr chart: