First Solar - Meaningful Operating Improvement Offers Opportunistic Investors A Long-Term Entry Point

Aug. 2.12 | About: First Solar, (FSLR)

First Solar (FSLR) the manufacturer of thin-film solar modules announced its second quarter results on Wednesday after the close. Shares rallied up to 20% in after hours trading on the back of the strong results.

Second Quarter Earnings

First Solar reported a strong set of results. Net sales came in at $957 million, compared to $533 million in the second quarter of 2011. On average, analysts were looking the company to report $818 million in revenues. Net income came in at $111 million, or $1.27 per share. This compares to net earnings of $0.70 per share last year, and analysts forecasts of $0.91 per share.

First Solar's results marked a notable improvement compared to the first quarter of 2012. Revenues rose over 92% on the quarter compared to first quarter revenues of merely $497 million. Furthermore the company announced a dramatic net loss of $5.20 per share in the first quarter on the back of $400 million in restructuring charges.

The dramatic improvement in quarterly revenues is largely attributable to an increase in projects being eligible for revenue recognition. The Antelope Valley Solar Ranch 1 and Silver State North project are among those. First Solar has been selling projects in development rather than lose panels, working much more on a project basis.

CEO Jim Hughes commented on the results, "we are confident that we have the right long-term strategy and the right platform to enable long-term growth and value creation. We believe that bye executing our strategic roadmaps and completing our restructuring program we can achieve our targets of 2.6 to 3.0 GW of sales in sustainable markets, earning a return on invested capital of 13 to 17 percent by 2016."

Non-GAAP Earnings

Net earnings have been seriously affected by three items over the last couple of earnings reports. During the second quarter the company took a $12 million charge related to warranty expenses. These are expenses associated to "remediation efforts related to the manufacturing excursion that occurred between June 2008 and June 2009." Furthermore the company took a $24 million pre-tax restructuring charge in an effort for further streamline the business. No impairment charges were taken this quarter. Excluding these items, non-GAAP net income would have come in at $145 million, or $1.65 per share. This compares to a $0.08 loss on a non-GAAP basis in the first quarter of 2012.


For the full year of 2012 First Solar now sees net sales coming in between $3.6-$3.9 billion, compared to an earlier guidance of $3.5-$3.8 billion. Earnings per diluted share will come in between $4.20-$4.70, reflecting an increase in the guidance range by $0.20 per share. The earnings outlook excludes restructuring and impairment charges and costs in excess of normal warranty expenses.

The full year guidance implies that First Solar expects revenues in the second half of 2012 to come in between $2.2-$2.5 billion. Furthermore non-GAAP earnings per share are expected to come in around $2.63-$3.13 per share.

The upwards revision in the full year outlook comes as a positive surprise to analysts. On average analysts were expecting the company to guide for annual earnings of $3.95 per share, on revenues of $3.48 billion.


First Solar ended its second quarter with $744 million in cash, equivalents and marketable securities, roughly the same as the first quarter of 2012. The company operates with $518 million in short and long term debt, resulting in a net cash position of roughly $226 million. Of interest is the $195 million in solar module collection and recycling liabilities which the company carries on its balance sheet.

For the first six months of 2012 the company generated sales of $1.45 billion. The company reported a net loss of $338 million, or $3.90 per share. Factoring in a 20% jump in after hours trading the market values First Solar at roughly $1.5 billion, or $1.3 billion for its operating assets if we exclude the net cash position. This values the firm at merely 0.4 times annual revenues and just 4 times earnings excluding restructuring, impairment charges and costs in excess of normal warranty expenses.

Currently the company does not pay a dividend.

Investment Thesis

Despite the re-bound in after hours trading to around the $18 mark, shares still trade with losses of around 50% so far in 2012. Despite the fact that quarterly results were boosted by the accounting impact of revenues recognition, investors should be happy with the meaningful improvement on top line revenue growth and the bottom line net result.

While the company is still on track to report a net loss for the full year of 2012, the majority of the restructuring, impairment and warranty charges should have been taken by now. At this rate the company is on track to show strong revenue growth for the full year and could potentially return to profitability in 2013.

For investors willing to invest in the long term prospects of the US solar industry First Solar is still the premier play. Especially the company's ambition to get rid of its dependence on subsidies, offered by cash-strapped governments, should result in more stable long term demand.

For long term opportunistic investors, shares trade at a 95% discount compared to its all time highs, while they have not witnessed significant dilution during the industry downturn. Those investors who are not afraid to take some risks could pick up some shares in the coming days.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.