For a few years, this stock was the best investment in clean
energy, according to many investors and analysts. Bar none. The
company boasted intriguing technology, stunning sales growth and
Now, by one measure, it's the single worst clean energy investment
on the stock market: The company lost investors nearly $15 billion
in the past two years, in what must rank as the most stunning
implosions investors have ever seen.
You usually see a stock chart like this when a company has
committed fraud or otherwise taken steps to mislead shareholders,
in effect running a house of cards that was designed to steal money
from an unwary public. Yet in this company's case, it was primarily
a victim of circumstance.
I'm talking about
First Solar (Nasdaq:
A promising feature
Just a few years ago, solar power appeared to have the backing of
many governments and businesses, leading the company to pump up
research and development (R&D) spending and quickly expand
manufacturing capacity. As we now know, that industry support
proved fleeting once government budgets became constrained and
traditional fuel sources like natural gas plunged in value. And
First Solar, like every other industry player, is struggling to
adapt to a smaller
opportunity and profound industry pricing pressures.
Most analysts -- yes those same ones that only recently had $150 or
even $200 price targets --now suggest you steer clear of this
stock. Most have price targets in the low $20s or teens and rate
the stock as "Neutral" or a "Sell." The dislike for this company is
now nearly universal.
Whenever you hear that the crowd agrees about a stock, it often
helps to listen to what a
voice has to say. (It would have been useful to hear from
analysts on this stock when it was soaring toward the $200 mark,
for example.) Now that it's in the teens, it's time to give a close
look at a recent upgrade from Merrill Lynch. In mid-April, the firm
boosted its rating on First Solar to a "Buy," with a $30
, which represents more than 60% upside.
Finally waking up
The ratings upgrade came right after the company belatedly
announced plans to cut manufacturing capacity. Merrill correctly
notes that demand for solar power equipment hasn't disappeared.
Instead, supply is the real challenge after three straight years of
capacity expansion at nearly every major player. A plunge in
pricing is now leading to the end of any further industry expansion
plans, and in some cases, companies are cutting capacity.
Lower costs should have a tangible impact on First Solar's
, according to these analysts. Their 2013
per share) forecast just rose from $2.80 to $3.40. And whereas EPS
was expected to slump down to $2.30 by 2014, First Solar should now
earn closer to $3 by then. That forecast bakes in more tough times
to come as industry pricing keeps falling. (The fact the consensus
2014 EPS forecast remains above $4.50 tells you that many analysts
aren't paying attention to their earnings models at this point.)
Merrill Lynch acknowledges that this former technology leader is
becoming a technology
. The company's solar equipment, using what's known as thin-film
technology, couldn't generate as much juice as traditional solar
panels, but it was so much cheaper that First Solar could
a compellingly lower total cost of ownership.
Not anymore. Traditional solar panel makers have made so much
progress on costs that they now offer a better return on investment
for most customers. Merrill Lynch concedes that this issue remains
a long-term concern. "We think that (traditional) crystalline solar
cell prices could be in the low to mid $0.70s by mid-2013, and it's
not yet clear how FSLR intends to cope with that. Yesterday's
(cost-cutting) move might best be described as taking the pressure
off for the intermediate term -- fundamental problems remain."
Yet here's the key takeaway, as far as Merrill Lynch is
concerned... Even with all of the current and future headwinds in
place, First Solar remains nicely profitable. And the plunge in the
stock below $20 is simply too much punishment. Merrill's $30 price
target reflects a multiple of 10 on projected 2014 earnings.
For my purposes, I need a bit more to go on than that. That's why
I'll be listening quite closely on the conferencecall when First
Solar releases quarterly results this Thursday, May 3.
I want to hear about the company's technology roadmap. Management
must lay out the case for the company's ability to re-take
leadership on cost per kilowatt. And they need to restore
confidence that expectations have come down far enough for 2013 and
beyond, and that there is now a bias for better-than-expected
growth and margins in the quarters ahead, and not
worse-than-expected, as many now fear. Still, Merrill's
is grounds enough for contrarian investors to revisit this hated
On a broader level, the brutal supply-and-demand dynamics that have
beset the solar power industry may slowly be turning. According to
Citigroup analysts, demand in a number of European countries has
started to rebound in the past few weeks (leading the firm to
upgrade several solar stocks, but not First Solar). And they add
that demand in China and the United States represent ongoing
drivers of demand, with Japan emerging as a major new source of
demand in coming quarters as the country tries to wean itself off
nuclear power. Improving investor sentiment toward the solar sector
would surely provide a boost to First Solar's
Risks to Consider:
First Solar has been spending heavily on R&D and will need
to come up with an even more compelling technology roadmap if it is
to start boosting profits into the middle of the decade.
Action to Take -->
First Solar has missed EPS forecasts by at least 15% for three
straight quarters. Many likely expect that to happen again this
Thursday. Take this time to brush up on the
and the numbers, because if the quarter -- and outlook -- are not
as bad as feared, then a relief rally could ensue. That calls for
quick action after the numbers are out, before analysts have time
to change their target prices. That said, there's no need to move
to buy shares BEFORE the quarterly results are announced.
My colleague Andy Obermueller takes a broader look at the beaten
down solar industry in his
newsletter. To learn more about his take on this industry,
including his recommendations,
follow this link
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.