First Solar: Pre-Earnings, Street Optimism

The Street is optimistic about tomorrows Q2 earnings report  of First Solar (FSLR), by far the biggest U.S.-traded solar stock by market cap. The consensus view is for revenue of $216.9 million and profits of 58 cents a share.

Daniel Ries, an analyst at Collins Stewart, says his checks suggest the company had a “strong quarter,” with the swing factor the company’s new Malaysian production facility. He says that his current forecast - $213.2 million and 58 cents - assumes 7 megawatts have been shipped from Malaysia, but that there have been reports shipments have been higher. He adds that pricing, which is largely in long-term contracts denominated in Euros, should benefit from the strengthening of the Euro against the dollar. He thinks revs could be 5%-8% above his estimate.

Ries adds that his checks find the company made “just a modest increase” in solar module efficiency in the quarter, but that greater improvement is expected in the September quarter.

For Q3, Ries is looking for the company to ship 130 megawatts of capacity, up from an estimate 87 MW in Q2. He sees Q3 revenue of $307 million and profits of 96 cents. He maintains a Buy rating and $320 price target on the stock.

Others also weighed in on FSLR today. Caris & Co.’s Ben Pang repeated his Buy rating and $350 target, asserting that the company will likely meet Street estimates. He says FSLR’s lower cost of ownership makes it more sheltered than other solar companies from potential government subsidy cuts in Spain and elsewhere. (He also notes that the company has low exposure to Spain, with most of its revenues coming from Germany and increasingly from the U.S.)

American Technology Research analyst John Hardy likewise expects a “strong quarter,” and says that the Street is likely to be focused on the progress of its Malaysian capacity ramp. He continues to rate the stock a Buy - with a $450 target - based on “its low cost advantage at the module level as well as its relative lack of fundamental exposure to near-term areas of legislative concern such as Spain and the U.S.

Cowen’s Robert Stone this morning also focused on the progress in Malaysia, asserting that “a faster ramp” could lead to 15% upside in Q2 revenue and 20% upside in EPS; that would be $250 million and 70 cents.

 

Comments

[John Lounsbury:]

FSLR has a promising technology (lost cost product) but has been supported with too much enthusiasm. Using the 3-5 year consensus earnings growth estimate of 45% per year and applying it over the next 10 years I calculate a current fair value of $85. If growth continues at 5% per year forever starting in year 11, fair value in 10 years will be approximately $550. I think the $250 range is paying way too much for FSLR, no matter what the current earnings report is. Cut the price in half and I'll start nibbling. I find much better valuations for LDK and TSL. I also follow ESLR but am not buying yet.

2008 Jul 30 09:02 AM

[T-table:]

jlounsbury59, thank you for your contrarian comment. I was wondering if you could show me how you did your fair value calculation.

2008 Jul 30 02:58 PM

[Pawel Kaczm...:]

The quote of "Ries adds that his checks find the company made “just a modest increase” in solar module efficiency in the quarter, but that greater improvement is expected in the September quarter."

Is very misleading. Efficiency increases are very marginal. The company reports:

We are currently on track to achieve our 2012 goal of 12% conversion efficiencies. This represents an increase of approximately 0.5% per year," spokesman David Erhart told Electronics Weekly. "In Q1 2008 our average efficiency was 10.6%."

Technically, the stock has been in a wide range for since April, every since insiders started selling $17+ million of stock!

Fundamentally, I think their model is moronic! Why would you create cells as a form of ALTERNATIVE energy with a scarcer resource (CdTe) than what you're trying to replace (Crude Oil)

For the risk tolerant, this is a great short (put spread) candidate before earnings.

alphaapprentice.blogsp...

2008 Jul 30 03:13 PM

[John Lounsbury:]

T-table

I use the classical text book formula for calculating present value based on discounting the future earnings cash flow back to the present. The classical model is called the dividend discount model, but I use earnings in place of dividends. The variables include earnings growth estimate, current year earnings (I use estimated earnings for the year not yet ended), expected rate of return for the market (I currently use 10%), currrent risk free return (I currently use 4%), and stock beta.

The equation is too complicated to put in this note. You can find it in any investment finance text book. For example, page 202 in "Investments: An Introduction" by Herbert B. Mayo, Fourth Edition, The Dryden Press, Harcourt Brace College Publisher.

Doing the fair value analysis is fraught with uncertainty. The biggest uncertainty is the earnings growth estimate. I feel these estimates are a real crap shoot. However, I try to make my bigger bets when I can buy good growth potential near or below calculated fair value.

2008 Jul 30 05:13 PM