If you're investing in an industry with a range of headwinds,
then it pays to stick with the company that offers the strongest
track record, lowest costs and most visible long-term
. That's been my logic in support of
First Solar (Nasdaq:
, which is the "best house in a bad neighborhood," as I wrote when
I recommended the stock
Back then, I assumed
had hit bottom after a prolonged sell-off. Boy, was I wrong. Shares
have continued tanking in sympathy with the entire solar sector. A
$10 billion in reduction in the company's
in the past year has surely been sobering. This company may be the
"best house," but it's the "bad neighborhood" that really matters
Why the steady drubbing? In recent weeks, prices for solar panels
have been plunging, in large part due to Germany's decision to wrap
up its heavy slate of solar spending immediately, rather than a
quarter or two from now.
Here in the United States, the Department of Energy loan scandal
regarding privately-held Solyndra has only made matters worse. Many
are now convinced that solar power has suffered a fatal black eye
in the United States, because the clean energy technology still
isn't competitive with fossil fuels unless the government provides
support. After Solyndra, Congress is even less inclined to support
The timing for First Solar is abysmal. After cutting its
manufacturing costs by 30% in the past three years, the company
says it is just 19% away from being truly competitive with more
traditional electricity sources such as coal and gas-fired power
plants -- without subsidies. Thanks to more than $100 million in
annual research and development spending, First Solar should get
there in a year or two. In effect, the stage is set for solar
power, led by First Solar, to really take off in a few years --
without the need for any sort of government support.
But right now, investors keep dumping all solar stocks. (First
Solar hit a four-year low on Wednesday morning, Oct. 12, before a
subsequent rebound.) The recent pressure, on top of bad news out of
Germany and Solyndra, is also attributable to a realization that
First Solar's near-term quarterly results could come in below
current forecasts. Management has bluntly stated First Solar will
lower its prices to protect
as Chinese rivals flood the
with lower-cost solar panels. That's a wise long-term move, but
will likely deliver a tough headline when quarterly results are
released on Oct. 28.
The challenge for investors is determining when to pivot from the
near-term depressed outlook to the still-bright long-term roadmap.
After all, shares already appear quite depressed at about six times
projected 2011 forecasts. Even if analysts lower their current 2011
earnings per share (
outlook from a current $9 a share to about $8, this stock is still
too cheap. Analysts at Auriga figure shares "offer compelling value
even if we were to cut our
, or earnings multiple, or both by as much as 20%." They recently
from $154 to $120, which is still more than double the current
Ah yes, those analyst price targets. Wall Street has proven far too
optimistic in establishing price targets for First Solar. Indeed,
many analysts have been steadily taking down their targets from
$150 to $130 to $110 to $90, where many of them now stand. In
effect, they've got no credibility, and current price targets ring
But it's also clear shares of First Solar have fallen far below any
. This value lies in steps taken in the past few years, when First
Solar took it on itself to create demand for its technology by
developing its own massive energy programs. The company recently
sold its 550 MW project, known as Desert Sunlight, to
for an undisclosed amount. A consortium run by
Edison International (NYSE:
has agreed to buy the energy output of the complex. In addition,
will buy First Solar's 230 MW Antelope Valley project. First Solar
gets to supply these projects with all of the necessary gear and no
longer carries the same level of
These long-term deals explain why First Solar are expected to keep
earning close to $10 a share for at least the next three to four
years. I assumed this kind of visibility into long-term backlog
would support the stock. I was wrong. A perfect storm has crushed
this stock, and it won't strongly rebound at least until earnings
are out later this month and management issues revised forecasts.
For that matter, shares may not stage a rebound until 2012, when
the industry finally finds a floor in terms of pricing and demand.
Yet the chance to own an industry leader at such a low valuation
Risks to Consider:
Industry analysts say solar panel pricing will hit bottom in
coming quarters as recent capacity additions are brought online.
Yet the entire solar sector won't sustain a rally until proof of a
bottom has emerged.
Action to Take -->
If you've been unfortunate enough to own First Solar on the way
down, then this is a lousy time to be a seller of the stock. But it
could be near time to average your
down by buying more shares -- but only if you're prepared to wait.
If you don't yet own this stock, then the current selloff creates a
very compelling entry point. Shares could still weaken further --
possibly into the $40s, but at this point the long-term upside
significantly outweighs the long-term downside.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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