Are The Bottoms In For First Solar And DryShips?

Includes: DRYS, FSLR
by: Kevin Quon

Followers of castaway companies First Solar (NASDAQ:FSLR) and Dryships (NASDAQ:DRYS) have been asking for some time when the market will recognize the locked-away value within these two companies. Though operating in industries as polar opposite as can be, the two have unknowingly been sharing similar fates in regards to their own unique histories. Both withering flowers had once bloomed with immense earnings power leading up to the Great Recession and were largely seen as the leaders of their own respective industries. Yet just as fast and as high as they had once soared, the souring economy, lack of trustworthy leadership, and an unforgiving investment base all bundled themselves into the perfect demise on the stock market.

DRYS Chart

DRYS data by YCharts

DRYS Chart

DRYS data by YCharts

Yet as extended as the decline has been over the past several years, both companies are beginning to stretch the limits in regards to their own discounted valuations. This can be seen in the stiffening resistance found in the bottom chart shown above. As of June 27, DRYS carried a market capitalization of $877 million and First Solar traded at $1.33 billion. DryShips and First Solar now trade at price-to-book ratios of 0.28 and 0.40 respectively. Oddly enough, both companies maintain positive earnings outlooks going forward, and neither appears to be in a dire straits, such as the market seems have already factored in.


Formerly a pure-play on the dry bulk shipping sector heading into 2007, DryShips' name now serves more as a misnomer as the company has taken on a large drilling segment and a tanker division. 'Ambitious' appears to be the kind word to describe management's decision to continually add more risk in the midst of its falling valuation. Rather than buffering up its balance sheet, the company expanded its fleet and took on additional debt. Yet as the shareholder bore the brunt of such recklessness over these past few years, to describe the company's business plan as anything short of well-timed simply wouldn't be true.

The company enjoyed lucrative spot prices as shipping rates roared, and it also locked them into favorable long-term charters as they came crashing down. Formerly ridiculed for exploring into a non-related sector found in deepwater offshore drilling, the company is now just beginning to enjoy the fruits of their labor found in the consistent cash flows of high charter rates revolving around oil production. The is of course contrasted to the shipping sector which is enduring a glut of supply and leading to industry-wide scrapping. Along the way, as the company took on more debt and expanded its fleet, it also cycled out its older drybulk ships to renew it as one of the youngest fleets operating to date. The current average age of the company's drybulk segment is 5.6 years.

And herein lies the kicker. For all the pain and ongoing dilution shareholders have endured over these past few years, the company is now likely to be in one of the best positions to be in as the shipping sector recovers. Of course this is conditional on the basis that market acts according to how management believes it will. DryShips now stands ready to embrace rising spot market prices as its charters come offline with one of the best equipped fleets available.

Additionally, should the recovery slow for an extended time period, the company could also liquidate part of its majority position in Ocean Rig (NASDAQ:ORIG) for a capital infusion. Above all, the company has stated it has no more plans for further expansion, a sign that could be signaling the company's best days still lie ahead. With scrapping beginning to take additional supply out of the market, DryShips may indeed be shaping up to be an interesting play for late 2013.

First Solar.

Still recognized as the world's leader when it comes to thin-film PV solar panel production and installation, First Solar remains very distant from being a dead operator. Yet the company trades as if it's already 6 feet under. Anxious investors appear to be greatly discounting the earnings potential going forward as they ignore the 3.91 forward price-to-earnings ratio or the company's current ratio of 2.48.

Yet this is not to say that the company is free from valid concern. The strategic retreat into the utility scale sector where the company still holds an advantage with its technology is often perceived ominously with ongoing doubts of whether the company can compete. With the vast decline in polysilicon prices over the past few years, the company's pricing advantage has all but disappeared. Additionally, with greater areas of process efficiency still found with the crystalline silicon panel manufacturers, First Solar is beginning to look like the sleeping hare who just woke up to see the tortoise rounding the corner.

Yet the company itself now recognizes the dire need to improve panel efficiency and has even outsourced part of the research and development needs to a specialist found in Intermolecular (NASDAQ:IMI). With proprietary technology that accelerates the R&D process 10x to 100x the capabilities of most companies, Intermolecular looks to be a good fit for discovering the next generation improvements to First Solar's panels.

Which brings us back to the present day concerns of the company. With the go-ahead finally being given to restart the Antelope Valley Solar Ranch One project based in Los Angeles County, the abundance of regulatory fears over whether the company's backlog projects are in danger appear to be easing. Paired with a new project win in Australia that demonstrates both the company's ability to secure new projects and to compete in hot-weather environments, and the momentum appears to be shifting back in favor of First Solar.

Will the company be able to define a niche industry in the utility scale sector? With its experience, balance of systems leadership, and other service-related advantages, First Solar appears on course to do just that. In the very least, it'll be impractical to expect the company to maintain ongoing losses as seen in recent quarters which were derived from restructuring costs and other non-recurring events. And with a healthy project backlog that the company is able to rely upon as it completes this conversion, indeed the company's tangible valuation should be considered with a bit more respect than is currently being allocated by the market. Time will tell what the new First Solar will look like, but truly the company is beginning to look far less devastated than its price charts have been indicating.

Disclaimer: Please refer to my standard disclaimer found here.

Disclosure: I am long DRYS, FSLR.