A recent downgrade from an investment brokerage concerned with faulty manufacturing sent First Solar (FSLR) stock down 10% in a matter of days. The 232,000 modules under question were manufactured from 2008 to 2009, and First Solar is actively working with system owners to repair or replace the units. First Solar doesn't expect these modules to have any significant financial impact for 2012. First Solar's current metrics indicate this is a popular asset for a short. It's also reasonable to expect a significant amount of trading activity surrounding the upcoming earnings release. Currently, First Solar is partially offsetting solar sector oversupply in the US and lower average realized prices by participating in large-scale utility projects around the world.
First Solar's forward price-to-earnings ratio is projected to be around 5.6; its current price is 0.62 times sales and 0.58 times its book value. First Solar's EPS is -$6.45, its EPS is down 105.9% in 2012 and projected to decrease 10.6% in 2013. But, over the past 5 years, its sales have increased 82.9%. First Solar's current ratio is around 2.5 and its debt-to-equity ratio is around 0.15. Its ROE is around -15.7%, its operating margin is -18.5% and its profit margin is -17.7%.
First Solar's float short is at 47.7% and its short ratio is around 3.8 - these are both strong indications that this is currently a popular short in the market. Its beta score is usually around 1.5 and its average volume is around 7.4 million. This stock is down 34% YTD and down 9.5% in the past month. But this stock has increased 23.6% since its last earnings release.
On its recent earnings report, second quarter net sales totaled $957 million, increasing from $532 million, YOY; net income totaled $110 million, increasing from $61 million, YOY. Solar system revenue increased to $902.7 million from $105.4 million, YOY while solar module revenue totaled $54.5 million, decreasing from $427.3 million, YOY. First Solar's ability to differentiate itself from similar competitors like SunPower (SPWR) will depend greatly on bolstering its international portfolio and improving efficiencies, thus reducing production costs and increasing conversion rates.
First solar recently announced it has agreed to build four solar plants for PNM Resources (PNM) in Mexico. Upon regulatory approval, the plans are projected to be brought online by the end of 2013 and will provide power for 7,000 homes in New Mexico. The New Mexico Public Regulation Commission is expected to provide a ruling on the construction during the fourth quarter of 2012. First Solar recently partnered with PNM Resources back in 2011 when it completed five projects with an aggregate output of 22 MW for the firm. These types of contracts make First Solar a more recognizable and viable asset for large-scale projects both domestically and internationally.
First Solar also entered into a power purchase agreement with PG&E (PCG) during the second quarter 2012 for 72MW of electricity from two solar power plants being constructed in California. These solar plants will generate enough energy to power 24,000 homes and the aggregate carbon dioxide reductions are comparable to 8,900 fewer vehicles on the road. The California Public Utilities Commission is expected to rule on the purchase agreements by mid-2013; delivery terms for the agreements will initiate in 2019. PG&E recently contracted with SunPower Corporation for 100MW from the Henrietta Solar Project.
First Solar recently worked with Verve Energy and General Electric (GE) Energy Financial Services to open a 10MW Greenough River Solar Farm located in Western Australia. This solar farm is expected to generate solar energy capable of powering 3,000 homes. WA Water Corporation will purchase energy from the 10MW Greenough River Solar Farm to offset the power consumption from its Southern Seawater Desalination Plant. GE and Verve Energy each have a 50% stake in the solar farm. First Solar's contract for maintenance and operating services for 15 years, it's also providing, procurement, construction and engineering services along with 150,000 of its thin film PV modules. Partnering with GE and working on a large-scale solar product in Australia each add significant clout to First Solar's growing portfolio.
First Solar may also benefit from the Department of Commerce raising the tariffs it will levy on Chinese Solar firms, and the EU is expected to initiate a similar increase on tariffs in 2013. This may help increase demand in the US and in the EU. Both scenarios are projected to increase demand and reduce competition for First Solar. First Solar recently appointed a managing director and vice president of business development with 25 years of experience in the Asian and European sectors. Bruce Yung has experience in renewable energy, oil, coal, gas, and the power-life cycle from development to operation. This will help First Solar increase its market share and opportunities for large-scale utility projects in China as the country begins to embrace more renewable energy initiatives.
First Solar recently entered into agreements in India to supply modules for two solar PV power plants with an aggregate output of 50MW. India's Jawaharlal Nehru National Solar Mission intends to generate 20,000 MW of electricity from solar plants by 2022. First Solar will provide over 580,000 of its solar modules for the two projects that are expected to be completed in the first quarter of 2013. These projects are expected to have an aggregate of 85,000MW per year, enough electricity for over 97,000 households in India. First Solar is also working to develop a charitable pilot project to help provide reliable clean energy for drinking water and irrigation to rural villages in India that are off-grid.
This is an opportune time to invest in First Solar whether you are bullish or bearish on this firm's outlook. Many of these projects are projected to begin or complete production in 2013. First Solar is attractive as a short in the near term or for capital appreciation in the long term. On the contrary, a positive earnings report may be a catalyst for a short squeeze, just as future manufacturing debacles could be effective for a short as many of these projects are initiated in 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.