First Solar: More Upside Potential, Less Downside Risk Than LDK Solar

Includes: FSLR, LDK
by: Saibus Research

Despite the fact that we were impressed with First Solar's (NASDAQ:FSLR) Q2 2012 recovery with regards to revenues and profits, we're still not fans of the solar companies. As sympathetic as we are to alternative energy sources, we noticed that these companies have been largely spilling red ink despite receiving billions of dollars in direct and indirect subsidies. We had expressed concern that the weakness in the solar industry was beginning to catch up to First Solar before its most recent quarter in which it benefitted from the sale of larger scale solar power generation projects to offset the revenue and profit declines from its consumer solar panel business. While First Solar has yet to recapture the momentum it enjoyed from its IPO up until 2010, we can safely say that at least it isn't losing money like LDK Solar (NYSE:LDK). We can make this conclusion because First Solar has a significantly larger presence in the solar power generation project segment than LDK, which relies primarily on consumer oriented solar module components like its Chinese solar brethren. This helped First Solar generate over 4X as much revenue as LDK Solar in the Q2 2012 period.

Sources: First Solar and LDK Solar Q2 Earnings Releases

Despite the fact that First Solar had over 4X as much revenue as LDK, First Solar's operating expenses for the quarter were only 29% than LDK's and even if we make adjustments for FSLR's $19M in restructuring charges and $30.5M for LDK's property impairment charges, we would see that FSLR's operating expenses were only 70% greater. Because FSLR has dramatically outperformed LDK with or without adjusting for these charges, we will be generous and adjust the operating expenses to exclude this expense. First Solar's operating expenses on a reported and adjusted basis represent a significantly lower proportion of its revenue than LDK Solar. Despite the fact that First Solar has shifted its gears to low-margin, high volume solar power generation projects, it still had a positive gross margin while LDK has a negative gross margin of negative 39%.

Sources: First Solar and LDK Solar Q2 Earnings Releases

We had also expressed our admiration for the fact that First Solar was probably the only solar company to be able to dramatically shift its focus from solar panels to large scale power generation projects. Granted, we found that the major utility companies who were purchasing First Solar's solar farm power generation projects were doing so mainly to satisfy renewable portfolio standard requirements as set forth by various state governments across the US. We also discovered that the solar energy generated by FSLR's solar farms cost 3-4 as much as conventional sources of energy generation. Despite the fact that we don't like the fact that FSLR's products are primarily selling due to government production mandates that jack up the cost of electricity to the ratepayers, we're prudent enough to reevaluate our position in the company relative to our first featured report on FSLR back in July.

We can see a clear difference in the outlook that each company has given for the Q3 2012 period. LDK Solar is expecting to see its revenues decline markedly in Q3 2012 from Q3 2011. LDK's Q3 2012 revenue is expected to come in between $220M-$260M, which represents a 45%-53% decrease from the $472M in Q3 2011. The real concern for LDK stakeholders is that its expected wafer shipments are expected to come in between 190MW and 240MW, versus 292.5MW in Q3 2011 and that its solar module shipments are expected to come in at 140MW to 180MW for Q3 2012 versus 192.5MW in Q3 2011. In contrast, First Solar has increased its guidance for revenue and EPS. First Solar increased the lower end of its revenue guidance range by $100M to $3.6B and increased its EPS by $.20 from $4.00-$4.50 to $4.20-$4.70.

Source: LDK's Q3 2011 and Q3 2012 reports

In conclusion, we are still bears on the solar industry. However, we can safely conclude that First Solar has more upside potential and less downside risk than LDK Solar. While LDK Solar has more revenue and profit from consumer oriented solar panels, we believe that First Solar is engaging in a strategic retreat from this segment. We see First Solar reorienting its operations away from consumer oriented solar modules and towards institutional oriented solar power generation systems projects. This is helping First Solar solidify its position as the solar industry's leader when it comes to profit generation and revenues. We can see that First Solar has better financial performance than LDK Solar, a sturdier balance sheet and is not subject to the new solar tariffs passed by the US government. Also, we like the fact that First Solar has to release its statement of cash flows quarterly whereas Chinese companies like LDK only release it annually. We are shocked that LDK has a debt to equity ratio of over 18.5-1. We could see that kind of leverage used by a tobacco company but tobacco companies are huge cash cows with eye-popping returns on equity. Solar companies do not have the cornucopia of cash flows that tobacco companies generate so seeing a debt to equity ratio exceeding 18.5-1 is quite alarming to say the least.

Sources: First Solar and LDK Solar Q2 Earnings Releases

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.

Disclaimer: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.