Is First Solar's Comeback For Real Or Too Optimistic?

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At an April 9 meeting with analysts in midtown Manhattan, First Solar management raised revenue and earnings guidance for 2013. The Tempe, Ariz.-based solar project developer and panel producer also outlined an aggressive road map to future cost and efficiency improvements. Management expressed optimism that 2015 earnings would rebound after a dip next year.

The market response was swift and positive.First Solar ( FSLR ) shares, which had traded above 300 in May 2008 but began the day at 27, soared more than 45% before the market closed.

Was the worst finally over for First Solar? Or was the bounce, fueled by an accounting change and short-covering, an overly optimistic reaction to management announcements?

Before tackling these questions, it's worth reviewing a bit of recent history.

First Solar has been unique in a solar industry where strong global demand has rarely translated into sustained corporate profit. Unlike most solar panel producers, whose devices are based on polysilicon, First Solar modules use a thin-film layer of cadmium telluride. As polysilicon prices soared several years ago, First Solar leveraged its low-cost panels into a thriving and largely profitable operation developing vast solar power projects, chiefly in the western U.S., for utilities and independent power producers.

Chinese Chill

But First Solar has recently felt the chill from highly subsidized Chinese solar panel producers. With ample access to local and state government loans -- and sometimes even free land -- Chinese producers flooded the market. And with so many subsidized producers offering product, industry overcapacity soon took the air out of prices. Tumbling polysilicon prices also helped slash panel prices and erode Fist Solar's cost advantage. Solar panels sold at $3.50 per watt in 2005, but just 75 cents per watt last year. And prices are still headed south.

First Solar had lost its cost advantage to the Chinese. Now, says Pacific Crest Securities analyst Ben Schuman, First Solar costs are "slightly higher" than those of "the best" Chinese producers.

Meanwhile, the domestic market for the vast solar engineering projects at which First Solar has excelled, appears to be slowing. So while First Solar still has a flush project pipeline, much of the resulting revenue will be booked this year and next. Just 20% of 2015 revenue is already in the pipeline, Schuman estimates.

But this year and next, First Solar has locked in enviable cash flow. Morningstar analyst Stephen Simko estimates that First Solar will generate almost $1.5 billion in free cash flow in 2013-15.

The plan is to put that cash to work through investments in technology that will restore First Solar's cost advantage. The company is budgeting more than $900 million in capital expenditures and expresses confidence in its ability to slash production costs.

First Solar's outlook now offers encouragement to both optimists and skeptics.

"I'm cautiously optimistic," said Robert W. Baird analyst Ben Kallo. "I'm leaning more to optimism, but it's not without risk."

Kallo is inclined to give First Solar the benefit of the doubt on its aggressive cost-cutting road map because "they have a good record in hitting targets." And First Solar's strong balance sheet, with nearly $1 billion in cash, should distinguish it from red-ink rivals. "One of the things that will keep First Solar at the forefront is that many of their competitors have solvency issues," he noted.

Even more bullish on First Solar is Lazard Capital Markets analyst Sanjay Shrestha. "They will be one of the long-term winners in the sector," he predicted.

He is especially encouraged by management forecasts that revenue in 2015 will rebound after a drop next year. First Solar forecasts 2013 revenue of $4 to $4.50, followed by $2.50 to $4 next year and $4 to $6 in 2015.

Last year, First Solar reported non-GAAP earnings of $4.90. But that did not count massive restructuring charges of $490 million that put GAAP earnings in the red. Shrestha believes the bulk of restructuring charges are largely in the rearview mirror. "Most of that is behind the company," he said.

Looking beyond this year and next, some analysts wonder if First Solar can replenish its pipeline, which will suffer as the U.S. market for utility-scale projects matures. But Shrestha thinks First Solar's plans to address new markets can succeed. "The industry needs to go to where there is growing demand for electricity and electricity prices are high and there is high solar radiation. He cites India, Chile and South Africa as three promising markets.

But Pacific Crest's Schuman warns that projects within the new marketing focus outside North America will in general be smaller. And First Solar will have plenty of competition. "First Solar is not the only company that has recognized this opportunity," Schuman said. "In my view, it will be very difficult for the company to deliver revenue in 2015 and 2016 at the same level as 2013 revenue."

Accounting Change

Some analysts wonder if investors realized that First Solar's sharply hiked 2013 revenue guidance was the result of an accounting change on a massive project in Riverside County, Calif. First Solar management announced it would book roughly one-third of revenue from the $1.8 billion Desert Sunlight project this year instead of next.

"The EPS beat was entirely driven by a change in revenue recognition policy for Desert Sunlight," wrote Credit Suisse analyst Satya Kumar in an April 10 note.

In late March, First Solar short interest represented 3.8 times daily trading volume. Though not exceptionally high, that was enough, some believe, to help fuel the 45% one-day rally.

"The big move was short covering," said Kallo.

Bullish analyst Shrestha notes that good news in an environment where "short interest was so high" and general sentiment on the solar sector "so bad" was a recipe for a sharp rally.

But he also expresses confidence that First Solar will safely emerge from the solar price wars. "First Solar is one of the candidates to be a long-term winner," he concluded.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: FSLR

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