First Solar Will Top Estimates Due to Favorable Exchange Rate

I've never been a fan of analysts, but their coverage of First Solar (FSLR) has been sub-par even by their own lackluster standards. Every analyst's estimate has been too low every quarter. In other words, every analyst has been wrong every quarter. I understand the game of underpromising and overdelivering, but this has been too extreme.

Just as an example, CIBC initiated coverage with a "sector perform" on FSLR back on Nov 5th and Merriman Curhan Ford initiated with a "sell" on Oct. 23rd. On Nov. 8th upon trading 35% higher upon a stellar earnings report, both tried to save face by upgrading the stock. Does three days really change your entire outlook on a company? Only if your outlook was unjustified to begin with.

Back in Feb 07 the analyst consensus was that FSLR would break even in 08. Now the estimate is $1.90, still way too low. Laughably, many analysts have been upgrading their price targets of 15% year end appreciation by 15% every month to keep pace. Those that lag behind commonly end up doubling their price targets. The truth is the analysts lag way behind the market. Even the market lags somewhat behind reality.

The official earnings estimate for FSLR was 19 cents last quarter. I was looking for 25-30 cents thanks to a favorable exchange rate due to the decline in the dollar. FSLR's costs are in dollars but their entire sales are in Euros, therefore any rally in the Euro dramatically increases margins. Actual earnings were 49 cents due to not only the exchange rate but also faster than expected rampup at the German plant.

Well, the quarter is halfway over and the Euro is at $1.48. Yet First Solar's official estimates are still based of a $1.30 exchange rate. Unless the exchange rate falls to $1.15 by the end of the year in order to meet that $1.30 average target, expect another huge upside surprise. I'm looking for 65 to 70 cents this quarter vs 53 cents.

Disclosure: Author is long FSLR.

Comments

[fxtrader07]

their costs are in dollars?? are you kidding??
you even mention their "ramp-up of the plant in germany". I guess, the people over there in Frankfurt/Oder get paid in Dollars??
and the plants in Malaysia surely require a lot of local currency for construction and especially for running them later on.
which is what will be a huge problem going forward. The Rinngit is set to appreciate a lot - that means an explosion of costs for FSLR.
you will see that their profit margins will head sharply south over the coming years. If FSLR lives that long at all. They may very soon see their European business getting killed dut to their Cadmium-technology involved. Not to mention competition from silicon-based solar getting which are set to get a lot cheaper down the road and from companies like nanosolar.
There is a lot of of hot expectations built in the stock price - the P/E is abscene by any standards.
dot-com-mania insanity reloaded: your name is fslr.

[fxtrader07]

sorry for the typos. clicked on publish by accident before correcting them.

[Andrew Ling]

Many but not all of their costs are in dollars. Being headquartered in the US much of their employee compensation is in dollars. Also much of the equipment and raw materials expenses are in dollars. The profit margin probably will indeed shrink in the short run before expanding against, since last quarter already met long term operating margin goals way ahead of schedule. Shrinking margins is part of the plan for increasing earnings. You would know that if you listened to the investor's day conference. By slightly shrinking margins into the future they plan on dramatically increasing demand.

Anytime a company in hypergrowth has such enormous margins whether it be Ebay in the 90s or Google today it's only natural for them to increase costs and thereby increase earnings. Ebay, which used to have an amazing 90% profit margin (servers are cheap) but miniscule profits did it through hiring personel and the acquisition of Paypal and Skype.

An analogy I like to use would be if you have a basketball player shooting 60% from the field, you should give him the ball more and let him score more often.

[solar jim]

while the p/e does seem high, that is only true if you accept the estimates the "pros" (analysts) put out. Show me one qtr they have been correct on FSLR's revenue, or earnings. Until they can show they have their model correct there is zero reason to assume they have the correct earnings the company will earn next year, which means that the stated forward p/e is in all probability much less than what is being currently reported, which is based on analyst estimates for next year, which we already showed is most likely behind given they yet to be correct once on this stock.

And as for costs exlpoding, how is that going to happen? What percentage of their operating expense is due to labor or items that they have to buy in Malaysian currency. These plants are very heavily automated and require very few people on hand to run the line. If you are so sure the Malaysian currency is going to hurt the company I expect that you've modeled out how products they have to buy there versus other places and shipping them there actually affect them. Malaysian currency only hurts them for items they have to purchase in Malaysia, or have you not heard of a fungible commodity? What items, specifically, does FSLR have to buy in Malaysia that are not available to be bought in another country and shipped in? What's the cost of those items differential increase by having to ship them to Malaysia rather than buy them in Malaysia and pay the high currency price? If you haven't done this type of modeling than you are simply a cheerleader for FSLR to fall. Real data crunching is good. Real analysis is good. Cheerleading, one way or the other, is not...

[Andrew Ling]

Yes, FSLR's labor costs are obviously very low compared to crystaline silicon PV manufactures. This is why they choose to build plants in Germany and Malaysia over lower labor cost locations. The tax advantages offered there must outweigh labor savings. In addition to the increase in profit margin relating to variable cost operations, you also gain an advantage in fixed cost return on assets. In a sense, the assets you paid for and financed in dollars become more valuable when the dollar declines. The gold miners are a good example of this. Their labor costs are probably also increasing very slightly, but as the dollar declines their margins increase across the board.

[Andrew Ling]

Well I was right on this one and the stock jumped over 30% on earnings once again. The 3rd time in 4 quarters of earnings that has happened. The same exact factors have occured once again for 1st quarter earnings in mid May. Once again I expect FSLR to beat the highest estimate due to the exchange rate averaging approximately $1.55/Euro during the quarter while estimates were based on $1.45/Euro.