First Solar: Is The Company, Or The Industry, Presenting Long-Term Value?

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

Over a period of four years, First Solar, Inc. (NASDAQ:FSLR) has lost nearly 95% of its value, going from a $22-billion company to now having a market capitalization of $1.30 billion. There are numerous reasons for this decline - which include high costs, change in demand, laying off 2,000 employees, the company closing its plant in Germany, subsidies being suspended, high exposure to a struggling European economy (more specifically Germany), and an excessive amount of pessimism within the industry that has led to strong selling of all solar stocks. Yet on Wednesday, after the market closed, First Solar delivered a very impressive earnings report, which leads us to the questions of whether or not the stock has bottomed, if its business is stable, and if it's now a good investment?

First, let's take a look at its earnings, which led to the after-hours gain of 20%. The company exceeded Wall Street expectations by a large margin posting revenue of $957 million and net income of $111 million - both gains of roughly 80% year-over-year. The company also lifted its full-year revenue guidance by $100 million and EPS by $0.20, along with delivering some encouraging news regarding its projects and power plant work that led investors to believe its restructuring plan is working in terms of rebuilding profitability at the company.

Obviously, there were significant improvements in the company's quarterly report, and its stock is trading accordingly because of these developments. However, the question is whether or not FSLR has reached a bottom and if it's presenting value. The improvements are great, but it doesn't mean that FSLR will achieve long-term growth, or stability. The industry itself is still weak, as Bloomberg reported because of First Solar's shift to projects it is the only company in the solar index expected to report a profit for the second quarter. As a result, this could indicate that First Solar's success and rally is not industry related, and that LDK Solar's (NYSE:LDK) 8.50%, Trina Solar's (NYSE:TSL) 4.30%, and JA Solar's (NASDAQ:JASO) 6.70% after-hour gains could be a bit premature.

In the company's report, it also indicated that its sales gain was "primarily due" to recognized revenue for selling power plants, including Exelon Corporation's (NYSE:EXC) plant in California. However, it appears the company has a good grasp on its guidance, due to its project pipeline; the question being whether it can keep its project pipeline full. Yet, despite questions that still exist, we must acknowledge progress, and because of its beaten-down stock, it had been priced for a worst-case scenario, meaning that a certain degree of value is being presented, as the company apparently seems stable for the next year, making it a potentially good buy.

In an attempt to determine whether FSLR is presenting value, we should remind ourselves that value is a perception that is never consistent, and is based on market and industry outlook and position. For example: we value a stock, the market, economic data, etc. all by expectations. When expectations are being met or exceeded, then stocks, the market, or economic expectations will rise. But once expectations are no longer being met, a stock (or the market) falls until there is an equal balance of fundamentals to stock valuation, or until expectations can once again be met.

However, these valuations depend on a variety of other factors such as market outlook or sector outlook; for example, in the year 2000, the market (S&P 500) was trading with a P/E ratio of over 30 because of a 20-year bull market and optimism among investors. However, today, the markets trade with a P/E ratio of about half, or 15, due to our outlook and pessimism following a dotcom bubble burst and a recession in 2009, as we are no longer as confident of the direction of the market. The solar industry is similar, four years ago the stock was valued much higher on mediocre fundamentals as the industry was thriving, but after slowed growth, we must take into consideration a changing outlook among investors who are no longer willing to pay a high premium for shares of FSLR, or any other solar stock such as JASO, LDK, or TSL.

If we compare the fundamentals of FSLR to the stock valuation in both December of 2009 and its expected revenue and earnings of 2012, you can see that the stock is presenting a significant amount of value, assuming expectations are met. After the company's 2008 earnings, the stock was trading with a P/E ratio of 40 and a price/sales ratio of nearly 9, which mirrors some social media stocks, seeing as how solar was expected to become a momentum industry for many years to come.

Although today, First Solar has more than doubled its revenue of 2008, and if it meets guidance, the revenue will be closer to 3x its 2008 sales. In addition, the stock has a forward P/E ratio of 3.89, and a price/sales ratio of 0.50 - which are both metrics that are hardly comparable to its valuation back in January of 2009, back when solar was expected to become the next big thing.

I'll be the first to admit, I am no expert when it comes to the solar industry. Like many, I followed the space back between the years of 2006 and 2009, but have somewhat neglected the space since its failure to live up to high expectations. And although a well-rounded investor should follow all industries, I think most would share my experience with solar, as its performance was watched, but the catalysts were not followed.

Therefore, despite the fact that turmoil still exists, and there are still many questions surrounding the future, the fundamentals of FSLR do suggest that the stock is undervalued, and the earnings suggest movement for the company is in the right direction. However, one must acknowledge that the road has been very bumpy for this company, as it just recently lowered guidance as early as February, showing the level of volatility within the space, and management's history of not being able to predict future sales.

Yet it appears as though there is some stability for the company, judging by the quarterly results; however, investors must tread carefully, and know that it is a high-risk investment that could turn negative with one slightly discouraging headline. That said, as for the fundamentals and valuation of the company, both look enticing - and if the company's turnaround is legitimate, then this could be a great investment, with massive upside that far exceeds the current downside.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FSLR over the next 72 hours.

Additional disclosure: The opinions in this article are of the author and should not be used to make any investment decisions without the consent of a financial advisor.