There is truth when I say that I have been a First Solar (FSLR) bear for some time now. I tried defending the company when it was near $100, but when we lost $80 just a couple of weeks later, I started to change my view. Since then, I have been calling the name a short idea. I still called the name a short at $40, $30, even at $20. Why? Because when it comes to this company, there is a huge difference between perception and reality.
Just a week or so ago, First Solar posted a huge quarterly loss as it took a massive restructuring charge. Generally, when a company posts lower profits or a loss on restructuring, we give them a pass. Since they are one-time charges, they are not a symbol of the company's actual health. That is true, but unfortunately, in this case, the restructuring charge hid what was a truly bad quarter.
First Solar was once a Wall Street darling. Shares traded for more than $300 in 2008. Even in early 2011, shares were over $160. On Monday, we were trading under $16, closing just a percent above that level. Since April 4th, 2011, just a matter of 13 months, shares have declined 90%. Not exactly what you would expect out of a company that increased revenues by 8% in 2011 and is forecast to show revenue growth of more than 25% this year.
First Solar is a very seasonal business, so quarterly revenues go up and down like a roller coaster. In the first quarter, revenues were down more than 12%. This quarter, the forecast is for a rise of 55%, and next quarter is expected to just show a 4% gain. But there is one thing that is for certain. The company keeps missing earnings expectations. Just look at the following table, from Yahoo! Finance, showing how the company has missed estimates the past four quarters.
(click to enlarge)
But those last two quarters are terribly misleading. Due to all the charges they took, the company actually lost $4.78 per share in the Dec '11 quarter and a loss of $5.20 in the Mar '12 quarter. Looking at the table, it looks like they posted a profit of $1.18 per share. Nope! They actually lost about $10 per share, on a GAAP basis.
Now, even though the company missed earnings expectations by 67 cents in Q1, the company raised full year EPS guidance from a range of $3.75 to $4.25 to a new range of $4.00 to $4.50. Sorry, but I don't exactly believe them. This is a company that over the past year has taken down revenue and/or earnings guidance practically every quarter. They didn't take down revenue guidance when they reported Q1 though. Why? Because they didn't give any revenue guidance, which makes me even more skeptical of their EPS guidance.
Now the company believes that the restructuring efforts will help them save money the rest of the year. I can see the logic in that, but they have a lot of ground to make up. Oh, and their gross margins in Q1 declined to just 15.44% versus over 45% in the prior year's period. For a business that is seeing dramatic margin compression, I don't see it happening. Even if it does, think about this. If current estimates hold, First Solar will report 35% revenue growth for Q2 to Q4 this year over last year. However, earnings per share for Q2 to Q4 will decline from $4.21 to $4.16. Not exactly a positive trend.
But this isn't even the worst problem with First Solar. Their balance sheet continues to get even weaker and weaker, with no signs of improvement. Just look at the following two charts, of their current ratio and debt (liabilities to assets). In less than two years, the current ratio has been halved. Over that time, the debt ratio has gone from just 17% to over 44%. A breakdown of the balance sheet follows the two charts.
So why have things gotten so much worse? Well just think about things logically. When you don't sell as much as expected, your inventory levels rise. Over the past two years, First Solar's inventory levels have risen from $172 million to $582 million. Yes, you can't sell what you don't have, but that is a staggering inventory increase. Also, if you have too much inventory, you might need to sell it for less than expected. That will impact margins. Another issue is accounts receivable. First Solar's accounts receivable total (including trade receivables and unbilled A/R), has increased from $295 million to $867 million over the past two years. In just the past two years, accounts receivable and inventory have increased from one third of current assets to one half of current assets. On the flip side, cash and marketable securities (as a percentage of current assets) have declined from nearly 51% to 23% over that time. The balance sheet hasn't just gotten weaker, it has become less flexible, and that could force more issues down the road.
Likewise, as I showed in the debt ratio chart, the ratio of liabilities to assets has soared over the past two years. Think about it this way. In the past two years, assets have increased by 66%. Total liabilities have increased by 309%. Yes, I said over 300%. What has been the big culprit? Well, long-term debt has increased from $136 million to $806 million, a rise of nearly 492%. Accounts payable are up 187% and accrued expenses are up 207%. Current liabilities are up 263%.
These are not exactly problems that will fix themselves in just one quarter. First Solar saw lower volumes and lower sales prices in Q1. It would be expected that some of those "lost" Q1 revenues could be pushed into later periods, but what if they aren't? What if some of those huge accounts receivable balances are not recovered? What if inventory balances stay elevated? Even analysts are starting to worry a bit. Three months ago, 13 analysts had buy ratings on the name, now, only 8 do. One analyst even has a $9 price target.
As for my investment recommendation, I am still recommending this as a short idea, but only for those who are already short. For instance, if you have been short since say $30, you can stay short because you still have a huge gain. You could lose some of it on a rise, and perhaps you could consider a stop loss. I would not start a new short position at today's levels, but if we do get a quick pop, I would consider shorting it then, perhaps around $18 to $20. There are just too many issues with the name currently, and I still believe they are months away from a true turnaround.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
