The seasonal solar cell market is not doing so well. First Solar (FSLR) has not been exempt from these troubling times. Profits and revenue have been fluctuating like a rollercoaster, and here's hoping investors don't need some sick bags. Analysts are citing falling stock prices, underperformance, and overall missed expectations as reasons to avoid investing in First Solar for the time being.
The market is looking at some slight increases right now. This has been greeted with skepticism instead of optimism, however, as bureaucratic red tape, poor infrastructure, corruption, and a poorly educated work force tend to be dark clouds in this sector of the market. It normally takes a lot of time, effort, and energy to create new products in this sector. However, right now, scientists are having successful results with PV (Cd-Te photovoltaic) cells, which has caused market conditions to quicken. Like I said, this is an optimistic turnaround, but something to be incredibly cautious of. This research and development growth may not continue forever at this pace, and then the company will be right back to where it was initially.
Overbuilding and reduced subsidies have caused prices to fall drastically (especially pertaining to the company's use of c-Si, crystalline silicon, cells). First Solar has run into the problem of needing larger modules to produce the same amount of power in regards to solar installation, and this is making profit hard to come by.
Solar cell producer Konarka filed for bankruptcy in June. Konarka was a branch of the Chevron (CVX), and given the company's recent financial state and inability to obtain additional financing, bankruptcy was the only option. This bankruptcy will not be an isolated event in the solar energy sector. If First Solar is scrambling, and if it does not remain on top of its circumstances, it will be looking at some trouble (just a few years ago the company was trading at $173 per share, now it's lucky to hover around its 52 week low at $15.43). This is an industry that is not immune to short falls.
First Solar, a company that used to be a giant money making machine on Wall Street, is now suffering. The company has recently reported substantial losses and hid this behind a claim of restructuring. While reorganization was occurring in the company, this also just created a smoke and mirrors effect to hide the struggles First Solar was actually having (bringing in a new CEO will do that). One of the world's largest solar providers, Canadian Solar (CSIQ), has posted nothing but losses coming out of the fourth quarter of last year. Like First Solar, the company has been working on capital management issues, but two straight quarters of losses show that something is going on beyond management. Simply put, it is the market. Canadian Solar has attempted to partner with one of the world's largest residential installers, Real Goods Solar (RSOL), to announce supply agreement. Hopefully this will make installation cheaper for Canadian Solar, and it will be able to post some profits - or even smaller losses - at this point.
Shares have declined 90% since April 2011, and the company continues to fall short of its earnings each quarter, even when you factor in the seasonality of the business. To make matters worse, its balance sheet is weakening every time you look at it. In the past two years, its debt ratio has gone from 17% to 44%. Despite potential glimpses of turnaround optimism, these numbers do not lie. Fellow solar company LDK (LDK) has had no positive cash flow at all in the past few years, and that does not bode well for it at all. While that's a terrible sign for LDK, it's also a bad sign for First Solar. It shows that government subsidies are declining and that the industry as a whole has stopped growing. LDK is currently only trading at $2.04 per share, and it may be next after Konarka in the bankruptcy department.
First Solar has also suffered from a shrinking industry. In the last two years, First Solar's inventory levels have increased from $172 million to over $582 million. Obviously, you cannot sell what you do not have, but this is a substantial increase that suggests the company might need to lower its prices to become attractive in a lower demand market.
Negative press has not helped First Solar one bit. One of the biggest issues right now for First Solar right now is the dispute over a Mitt Romney campaign advertisement. The company, along with Ecotality (ECTY), are both claiming that it has not wasted government money and will not be filing bankruptcy (as is depicted in the ad by company Solyndra's filing for Chapter 11 Bankruptcy). The Romney camp is using this advertisement to attack President Obama's support of failing businesses, as Solyndra received a $535 million dollar loan and then filed bankruptcy, thus supposedly wasting government funds. This negative press has had a negative effect on stock prices.
Posting substantial losses are always disheartening for any company. Posting poor revenue that falls well below expectations is even more disheartening. We cannot pretend that this is just a one quarter problem that will bounce back instantly. The fact of the matter is, though, that First Solar's competitors are not doing all that well either in these uncertain and turbulent times.
The news is not necessarily all bad. With the International Energy Agency stating that solar power will provide 22% of the entire world's energy by 2050, First Solar is poised for some growth if it can work out the lawsuit and other setbacks. Saudi Arabia has announced a $1.9 billion dollar pledge to make sure this IEA goal is met within the next twenty years. In response, First Solar plans to open a manufacturing center in United Arab Emirates to capitalize on this and other Middle Eastern ventures. If the market sticks to this goal, we could see a real turnaround.
Analysts are torn over First Solar. Some say "buy." Some say "sell." Some say there are more lucrative solar energy stocks out there, like Sunpower (SPWR), with a P/E of 7.94 and P/B of 0.45. Overall, solar companies are currently burning through cash and subsidies faster than the sun can heat up their panels. The solar market is not in good place right now, but if you choose to invest in this sector, cheap and conventional is the way to go.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.