First Solar - Sell-Off On Headline Numbers Provides Interesting Entry Point

| About: First Solar, (FSLR)
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Shares of First Solar (NASDAQ:FSLR) are falling in after-hours trading as the solar company announced its second-quarter earnings report.

While the company severely missed on consensus estimates, the long-term outlook until 2015 remains unchallenged. As such the sell-off in after market trading might provide investors with an interesting entry point.

Second-Quarter Results

First Solar generated second-quarter revenues of $519.8 million, down 46% compared to last year. Revenues fell by 31% compared to the first quarter. Consensus estimates for revenues stood at $721 million.

Revenues fell on lower project revenues and module-only sales to third parties. Revenues in the second quarter last year were boosted by the revenue recognition for AVSR. Additionally the sale of AWB projects is expected to be completed in the second half of this year, instead of in the second quarter.

Earnings per share fell to $0.37 on a diluted basis. This compares to last year's earnings of $1.27 per share, and first-quarter earnings of $0.66 per share. Revenues fell short compared to consensus estimates of $0.52 per share.

Partnership With General Electric

First Solar furthermore announced the acquisition of General Electric's (NYSE:GE) cadmium telluride solar intellectual property. It will also form a technology collaboration agreement with GE to advance thin-film solar cells and modules.

In exchange for the intellectual property GE will receive 1.75 million shares in First Solar.

Updating The Full-Year Guidance

First Solar is adjusting its full-year guidance on the back of some important developments. It will hold two system projects through construction before it will sell them to improve the economics of those projects. First Solar will furthermore incur higher costs at its AV solar ranch due to delayed county approval. The collaboration agreement with GE will boost operating expenses as well.

As a result, full-year revenues are seen between $3.6 and $3.8 billion, down $200 million from the previous guidance. Gross margins are seen between 22 and 23%, up slightly from the previous guidance. Operating income is seen between $405 and $435 million, down $25 million from the previous guidance. Consensus estimates for full-year revenues stood at $3.83 billion.

As the effective tax rate is expected to increase slightly, earnings per share are seen between $3.75 and $4.25 per share, down $0.25 from the previously issued guidance. Factoring in dilution from a recent equity issue and shares granted to GE, earnings per share will come in between $3.50 and $4.00 per share.


First Solar ended the second quarter with $1.29 billion in cash, equivalents and marketable securities. The company operates with $256 million in total debt for a net cash position of around $1 billion.

Revenues for the first six months of the year came in at $1.27 billion, down over 12% from last year. First Solar reported net earnings of $92.7 million, or $1.03 per share, which compares to large losses last year, on the back of restructuring and impairment charges.

Factoring in losses of 8% in after hours trading, shares are exchanging hands around $42 per share. Assuming a share count of 100 million to reflect the recent offering of almost 10 million shares and the shares granted to GE, the market values First Solar at $4.2 billion. This would value operating assets of the firm around $3.2 billion.

This values operating assets of First Solar at 0.9 times annual revenues and around 9 times annual earnings.

First Solar does not pay a dividend at the moment.

Some Historical Perspective

Long-term investors in First Solar have seen their fair share of volatility. Shares set all-time highs at $300 per share in 2008, before falling to lows in their teens by mid-2012. Shares have seen an impressive recovery ever since to recent highs around $60 per share.

Between 2009 and 2012, First Solar managed to increase its annual revenues by a cumulative 65% towards $3.4 billion. After reporting large profits in 2009 and 2010, the company was forced to report losses over the past two years on large write downs.

Investment Thesis

The first thing investors need to realize is that First Solar is not your typical company. The fact that it missed revenues by a milestone is not really representative given the impact of revenue recognition practices for large projects. The decision to hold projects through construction, which hurts full-year revenues might hurt short-term revenues, but is done to achieve the best economic outcomes in the long term.

The partnership with GE and the acquisition of 1.5 GW pipeline of U.S. and Mexican development assets from Element Power, prove the company is on the right track to build the pipeline and create superior technological offerings.

Back in May, I last took a look at the company's prospects. The company's Investors Day in April sparked a 45% rally in First Solar's shares in a response to the strong outlook for 2013 through 2015. Essentially shares will have strong support as the outlook has provided a floor around $30 per share for First Solar's shares.

Essentially, First Solar is expecting full-year revenues to grow from around $3.7 billion this year toward $4.5 billion in 2015, while growing earnings in a linear fashion. The company used the jump in the share price wisely to raise almost half a billion in cash, to further fortify its balance sheet. A strong financial position is a competitive advantage in the financially challenged solar industry.

I remain cautiously optimistic. I think investors are reading too much into the headline numbers witnessing the after-hours sell-off. The long-term road map for 2013-2015 remains unchallenged and the current sell-off might provide prospective investors with a possible interesting entry point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.