I sometimes receive questions from investors asking about the impact of seasonality on a business. This is an important issue for a company. If certain quarters are much better than others, it can not only make comparisons between quarters difficult, but also can provide misleading information on what could be a good investment. Today, I will show why First Solar, Inc. (FSLR) is a great example of a seasonal business that could be bought. I have been a huge bear of this name, and the solar sector in general, over recent times, but First Solar is starting to prove again why it is the sector leader. Despite my opinion that the sector is still in trouble overall, I believe that First Solar is differentiating itself again from other names.
First Solar really proves how seasonality can sometimes make things look really bad for a name. In its first quarter this year, the company posted a revenue number that was $70 million less than the prior year period. That represented a 12% drop year over year, and the number posted widely missed analyst expectations.
But the main culprit for the miss was that certain revenues could not be officially recognized during the quarter, and First Solar told us that after the fact. So I came out in early July and mentioned to investors that they were going to see a huge spike in Q2 numbers compared to the prior year period. At that time, analysts were expecting a 54.5% increase in year-over-year revenues. Some of that was due to Q2 being a stronger quarter, but it also had to do with certain revenues not being picked up in Q1. When First Solar actually reported revenues, they were up 80% year over year, much stronger than expected, probably getting those Q1 revenues in, but as I'll detail in a bit, might have also stolen some from Q3 as well.
So now looking at Q3, here's where investors might get scared off. Current analyst forecasts call for revenues to decline by 4.2% and for earnings per share to fall from $2.25 to $1.04. Yes, numbers are expected to be down from last year in this quarter. But you just saw a company report an 80% increase in Q2 revenues, and just wait until I get to Q4. For now, I can see the following article titles when First Solar reports its Q3 results (let's assume they just meet estimates): "First Solar reports lower revenues" and "First Solar revenues decline 4%". Article titles like that will be found, and on the face of it, you might think it is a big negative. Don't get scared off. For example, if First Solar reports revenues that decline by 2%, it might look negative, but that figure would actually beat estimates.
You can't think about Q3 in negative terms without looking at Q4 either. Current estimates call for revenues to increase by 99.8%. Yes, that's a double. Again, last year's Q4 was weak, but it's also seasonal. Q1 had revenues under $500 million, Q2 was at $957 million. Q3 and Q4 are forecast to be $963 million and $1.32 billion, respectively.
So why is this a reason to be investing in this company? Let's look at a couple of reasons to be positive.
First, even after all of the seasonality, First Solar's 2012 revenues are expected to be up 34.9% for the full year period. That's not exactly a small revenue increase. Also, when the company reported Q2 results, it actually raised its revenue forecast for the year, from a range of $3.5 billion to $3.8 billion, to a new range of $3.6 billion to $3.9 billion. At that time, analysts were expecting just $3.48 billion, and now the consensus estimate is for $3.73 billion. Also, First Solar raised its earnings per share guidance, and this is for adjusted earnings, taking out items like warranty costs and the huge restructuring plan. The company stated that earnings would be $4.20-$4.70, compared to prior guidance of $4.00-$4.50. Analysts were expecting $3.95, and are now looking for $4.47. Yes, it is down from last year's $6.01, but at least they are raising their guidance, not taking it down.
Second, First Solar is the only one in the main solar space that is actually profitable (on an adjusted basis). We just got an earnings report from Trina Solar (TSL), which badly missed expectations. Because industry conditions are less than spectacular, Trina also cut its Q3 and full year shipment forecast by quite a bit. For a while, analysts were expecting Sunpower (SPWR) to record a profit in 2012. The company may actually record a profit when the year is over, but for now, expectations call for a penny loss, so even if they do profit, it won't be very much. First Solar's profit of more than $4 this year will clearly be tops in the industry.
Third, First Solar saw a rise in gross margins during Q2. This is especially positive after the dramatic decreases we've seen in recent quarters. The table below shows the company's gross margins over the past four quarters. Not only were the Q2 gross margins higher than Q1, but they even beat the Q4 figure.
The last positive I want to mention is that First Solar really improved its balance sheet during Q2. Overall, the size of the balance sheet shrunk because the company paid back about $335 million in long-term debt, about 41.5% of its outstanding total long-term debt, and that really helped some of its ratios. The debt (liabilities to assets) ratio improved from 44.42% to 38.74%, and the liabilities to equity ratio improved from 79.92% to 63.24%. The current ratio also ticked up from 2.48 to 2.56. The company has over $740 million in cash and investments on its balance sheet, which gives it a strong $1.5 billion in working capital.
First Solar shares recently hit $25 for the first time in about five months, and have more than doubled off the 52-week low of $11.43. At that price, the company was priced as if it was going out of business soon. The company proved in Q2 that it was here to stay, and the stock has rallied as a result. Now, I don't see the name getting back to the $165 level we saw 18 months ago anytime soon, but if this company hits its marks over the next few quarters, I think we could easily get back to $40 or $50.
But like I've said, this is the best name in a bad industry right now. If industry conditions deteriorate, First Solar shares could fall even if the company is doing better than the others. That's why I wouldn't recommend throwing all of your money into this name or giving it a large part of your portfolio. But at this point, I don't think it would be a bad idea to give First Solar a small part of your portfolio, almost a "speculative type" play, where you can increase your holdings going forward if things actually show improvement.