Buy First Solar On Dip, Avoid Gannett After Belo Acquisition

| About: First Solar, (FSLR)
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Today, we are looking at stocks that have been in the news today and have company developments that do strongly affect share price. Through this article we want to uncover whether recent developments leave the stock as a buy, sell, or hold. Within the article, we will breakdown the development, price companies, and recommend whether now is the time to buy, sell, hold, or even avoid. Additionally, we will give you places to buy the stock and targets to look for.

Stocks To Watch:

Today, we are looking at positions in First Solar (NASDAQ:FSLR) and Gannett (NYSE:GCI).

The big news of the day in solar was that First Solar is set to raise cash by increasing share totals. The company is selling another 8.5M shares bringing its total shares from 87.8M to 96.3M. The announcement shed share prices 12% over the last two days since the announcement. The company, though, will be able to raise over $400M in equity. With the sale, the company is expected to fund some future plans, which may include acquiring solar PV projects, developmental projects, and invest in new business markets. Today, we want to look at the effect this deal has on share prices and whether or not the correction has been overdone or not enough yet.

To do so, we want to do a cash flow analysis. To do so, we first need to project for five years of growth. Right now, the company is expected to have shipments at 1.6GW to 1.8GW for 2013 with around $3.6B in revenue with operating income around $430M - $460M. Capital expenditures are expected to be around $350 - $400M. The company has a lot of potential, though, moving into 2014 with the company's Desert Sunlight project starting to be recognized in the 2013 2H. The project is a 550MW farm in California that is a ground mount solar farm. The project is expected to be completed by 2015, but the company will start to turn on power and start to make some revenue recognition in 2H of 2013. Moving into 2014 and 2015, here are projections from the company:

With this information, let's take a look at a cash flow analysis:

Price Target Analysis

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income


















Capital Expendit.






Working Capital






Available Cash Flow






Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for FSLR: 9.65%.






PV Factor of WACC






PV of Available Cash Flow






Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for FSLR: 4.65%


Available Cash Flow


Divided by Cap Rate


Residual Value


Multiply by 20167PV Factor


PV of Residual Value


Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows


PV of Residual Value


Cash/Cash Equivalents


Interest Bearing Debt


Equity Value


Step 5.

Divide equity value by shares outstanding:

Equity Value


Shares Outstanding


Price Target


With current shares, we see price target about $50. Before the announcement, therefore, we believed that the company was looking a bit overvalued. The issue, for us, with FSLR is that the company is still going to have to see capital expenditures at high levels, and with current market knowledge, the market is still overcrowded and margins remain limited. The problem for FSLR remains that the company develops thin film. FSLR used to have an advantage because of this cheap offering, but other companies have reduced costs. We can see that margin issue as the gross margin has dropped from 54% in 2008 to 25% in 2012. That rate was the lowest since FSLR started reporting margins. We expect a bottom is starting to form for those margins, but to expect significant margin expansion is hope rather than a strategy.

Now, with the new shares outstanding. We do not need to adjust WACC, but we do need to adjust the implied equity value divided by shares outstanding. That moves from 4378 / 96.3 = $45. Therefore, the pullback in FSLR has made the stock much more fair valued in our opinion. At the same time, we will see likely a more reduced capital expenditure ratio of around $400M. If we spread that over 2014 - 2017, taking off $100M of each year, our projection changes to a price target of $69/share. It's hard to predict exactly that the $400M will reduce capex exactly, but we can see the power of reducing expenditures for the company.

Therefore, what to do? Overall, we believe FSLR is not a great buy right now. The solar market is still not fully recovered, and while the company is showing solid organic growth in the USA, margins should not really repair themselves until 2015. We believe the stock is a solid buy if it can get under $40/share. For current longs, the drop is probably too much and a nice add point if you are a conviction buyer of FSLR.

Recommendation: Buy FSLR On Drop To $40

The other stock we are looking at today is Gannett. GCI is in the news after buying out Belo (NYSE:BLC), a company that owns twenty television stations as well as fifteen websites. The twenty television companies are a mixture of ABC, NBC, CW, CVS, and Fox channels. For Gannett, it expands the company's TV offerings to 43 companies and further diversifies the company's media offerings. Gannett has made a lot of progress after being hit due to its heavy print media assets. Some of GCI's most important assets are USA Today,, and MetroMix. Here are the details of the BLC acquisition:

Gannett Co., the diversified media company that owns USA TODAY, nearly doubled its TV station business Thursday with its purchase of competitor Belo Corp. for $2.2 billion.

The deal will expand Gannett stations' reach to nearly a third of U.S. households.

The acquisition increases Gannett's broadcast portfolio from 23 to 43 stations and their associated websites and makes it the fourth-largest owner of network TV affiliates in households reached, behind CBS, Fox Broadcasting and Sinclair Broadcast Group.

With 21 stations in the top 25 markets, it also becomes the largest owner of CBS affiliate stations and expands its already-largest NBC affiliate group. "We become a true super group," CEO Gracia Martore said in a conference call with analysts Thursday.

The McLean, Va.-based company will acquire all outstanding shares of Dallas-based Belo for $13.75 per share in cash, or about $1.5 billion, and assume $715 million in existing debt.

So, is this a "super" deal? First, let's talk about how much it cost to buy the company. GCI is paying $2.2B for the company. Last year, BLC made $715M. GCI, therefore, only paid about 3x revenue. The company earned $103M, and in that sense they paid about 21x earnings. A good deal to pay 21x earnings for BLC. Before today's announcement, shares were trading at 11x earnings. That price seems a bit steep. As of today, the company had only $140M on its balance sheet and a FCF level of $540M, so the company will need to take on debt or more equity to pay the deal. What are the benefits to GCI?

With a larger amount of stations, the company will be able to market itself in more markets and leverage advertising opportunities. Companies in cross-markets can take on bigger deals in two markets. More importantly, though, with such a large amount of local TV stations, the company hopes to be able to keep the retransmission fees of original programming from networks like NBC/ABC/etc. down. With more stations, GCI can come to the table with more to offer and keep costs in check. Additionally, it expands GCI into Texas and the Pacific Northwest where they have little exposure. Additionally, growing the business helps them to not become marginalized in an ever-changing media landscape. The face of TV continues to change as more moves online.

Here are some statistics that trouble us though about local TV stations. We believe that advertisers are starting to move towards cable and online as ratings grow for cable television series on channels like Bravo, AMC, and Food Network. Just this week, News Corp (NASDAQ:NWSA) FOX noted that they were seeing volumes down 10% year/year as their ratings fell. Broadcast networks are not doing as well as in the past due to devices like the Hopper from Dish Network (NASDAQ:DISH) and Aereo, where you can watch live TV online without paying for any cable and save shows. The problem is that commercials are not streamed as much, and therefore, the free TV model that the broadcast networks employ may soon disappear. Acquiring a bunch of new broadcast channels may not be all that the gains in GCI appear to be. These issues are real for the company.

The deal does add $750M+ in sales and $100M+ in earnings this year. That would push GCI's revenue from $5.3B to over $6B and help earnings rise from $424M to over $525M. EPS will grow from 1.85 to 2.3. Before today's surge, PE for GCI sat at sub-10. At today's close, PE is at 13.6. When adjusted for a new EPS, PE sits at 11.6. Therefore, shares are still pretty cheap, and the market gave a bit of future value to the deal. The future, though, for us remains cloudy. We see too many issues like cable's rise, online streaming of shows, and online news to jump behind this deal. Shares are still cheap, but with strong levels of debt taken on and a definite overpay for BLC, we have to say that this deal is not a game changer for GCI.

Recommendation: Avoid GCI

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

Business relationship disclosure: The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article