First Solar - Investors Overreact To Lower Cash Flow Projections

| About: First Solar, (FSLR)
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Shares of First Solar (FSLR) fell 8.9% in Friday's trading session. The manufacturer of solar modules reported a disappointing set of third quarter results. Investors are disappointed by lower third quarter revenues, and a lower outlook for full year operating cash flows.

Third Quarter Results

First Solar reported third quarter revenues of $839.1 million, down 17% on the year. Lower revenues were primarily the result of the completion of the Silver State North project during the second quarter and lower construction activity at Ague Caliente. Revenues missed analysts consensus of $966.5 million.

The company reported net income of $1.00 per fully diluted share. This compares to earnings of $2.25 per share in the third quarter last year and second quarter earnings of $1.27 per share. Net income fell from $196.5 million last year to $87.9 million in the third quarter this year. Earnings did beat analysts consensus of $0.87 per share.

CEO Jim Hughes commented on the results, "Despite continued uncertainties and over-supply conditions in the market, First Solar delivered another strong quarterly performance. Our quarterly performance coupled with our recent project wins in sustainable markets demonstrates we are making meaningful progress in achieving our strategic plan for long-term growth and value creation."


First Solar adjusted its full year 2012 outlook on the back of these third quarter results. Full year sales are expected to come in between $3.5 billion and $3.8 billion. The new guidance is down $100 million compared to the previous guidance as a result of weather-related disruptions. These circumstances may push fourth quarter sales into the first quarter of 2013. Analysts expected the company to guide for full year revenues of $3.72 billion.

The guidance forecasts fourth quarter revenues of $1.2-$1.5 billion.

Non-GAAP earnings per share are expected to come in between $4.40-$4.70 per share, compared to a previous guidance of $4.20-$4.70 per diluted share. Restructuring charges of $6 per share will result in a GAAP net loss between $1.30 and $1.60 per share.

The negative surprise came from the lower operating cash flow guidance. Full year operating cash flows are expected to come in between $650-$850 million, compared to an earlier guidance of $850-$950 million.


First Solar ended its third quarter with $717 million in cash, equivalents and marketable securities. The company operates with $530 million in short and long term debt, for a net cash position of $187 million.

For the first nine months of 2012, First Solar generated revenues of $2.3 billion. The company reported a net loss of $250 million, or $2.89 per diluted share. The company took $444 million in restructuring charges so far this year.

The market currently values First Solar at $2.0 billion, which values the operating assets at roughly $1.8 billion. Based on the full year outlook, the operating assets are valued at 0.5 times annual revenues. The company is valued at roughly 5 times annual non-GAAP earnings.

First Solar does not pay a dividend at the moment.

Investment Thesis

Year to date, shares of First Solar have fallen roughly 33%. Shares rose from $35 in January to $50 in February. Shares hit lows of $12 in May after the company took massive restructuring and warranty charges. Shares recovered to $25 in August and are currently exchanging hands at $22.50 per share.

Over the past five years shares have been decimated. Shares traded above $300 in 2008 at the peak of the solar boom. Lower subsidies, the recession and the impact of cheap Chinese subsidies hit shares hard. Furthermore, First Solar took charges related to inventory and warranties. Despite the difficult circumstances, annual revenues tripled from $1.25 billion in 2008 to an estimated $3.5-$3.8 billion this year. The company reported a net profit of $350 million in 2008 and is expected to report a $125 million loss this year.

Last year, Chairman Mike Ahearn fired CEO Rob Gillette which marked the start of the restructuring of the business. First Solar has made a fundamental shift away towards building power plants. Competition in the market for the construction of solar panels is too intense and volatile. First Solar took its losses and is expanding in new countries which still offer government subsidies including Australia, India and Dubai.

Promising is that First Solar sees signs of industry stabilization after many production cuts and a string of bankruptcies in the solar industry. During the quarter First Solar reported a 13 megawatt power plant deal in Dubai, and two more deals in India with a capacity of 75 megawatt. First Solar produced 490 megawatt during the quarter, with factories running at 83% of capacity.

The increase in efficiency continued throughout the quarter. Manufacturing costs fell by five cents on the quarter to $0.67 per watt. Costs are down ten cents on the year. First Solar improved its conversion ratio by 90 basis points to 12.7%, with the best lines achieving efficiency of 13.2%. At this rate costs could fall below $0.60 per watt by the end of 2013. The total order backlog stood at $8.9 billion at the end of the quarter versus $9.3 billion at the start of the year.

I think investors might be overreacting a bit to the disappointing revenue numbers and the lowered cash flow guidance. An opportunistic investor could buy on the dips in the coming weeks.

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.