Is First Solar’s Stock a Buy?

With shares of First Solar (NASDAQ:FSLR) trading at $24.55, is FSLR a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s MovementSolar Panels

First Solar released third-quarter earnings after the bell on November 1 that did not inspire any faith in investors. Shares closed down 8.92 percent the following day. Non-GAAP EPS per diluted share came in at $1.27, beating estimates by 23 cents, and full-year EPS guidance is on track with estimates of $4.55. Accounting for restructuring costs, third-quarter EPS was $1.00.

However, revenue fell 17 percent year over year to $839 million, missing estimates by $127 million. The forecast for 2012 operating cash flow was reduced by $200 million, to a range of $650-$850 million.

The good news from the report is that the cost of production per watt fell by 5 cents to $0.67.

On November 6, Election Day, the stock closed up 6.29 percent. Obama is a well-known friend of the solar industry, and four more years would likely mean continued support from Washington. The solar industry has been on a wild ride recently, but the reiteration of anti-dumping and countervailing tariffs against Chinese solar imports should help stabilize the American industry.

H = High Quality Pipeline

First Solar is the “world’s most vertically integrated solar company,” according to its website.

In July of 2011, the company broke a 10-year old record and produced a cadmium telluride solar cell that was 17.3 percent efficient, which is an exceptional rate. The average efficiency of a First Solar panel in 2011 was 11.7 percent, with the goal of being 13.5 to 14.5 efficient on average by the end of 2014.

E = Debt to Equity Ratio is Close to ZeroSolar Panels

First Solar’s debt-to-equity ratio of 0.15 is pretty much the tops when compared to competitors. Suntech Power Holdings (NYSE:STP) is sitting on a debt-to-equity ratio of 2.84, while domestic industry partner SunPower Corporation (NASDAQ:SPWR) clocks in at 0.72.

It’s also important to consider total debt and total cash on hand. First Solar has more cash than debt, and more cash than its competitors. This war chest will likely prove useful during the fourth-quarter while guidance is low and the company undergoes some restructuring, which cost the company 27 cents per share in the last quarter.

First Solar Suntech SunPower
Total Debt $530.21 million $2.26 billion $827.44 million
Total Cash $716.99 million $473.7 million $377.13 million

 

T = Technicals on the Stock Chart are not so Hot

As of November 6, the stock price is 1.74 percent above its 20-day simple moving average, or SMA; 3.63 percent above its 50-day SMA; and 1.98 percent above its 200-day SMA. The stock is trading in a 52-week range of $11.43-$51.89.

Since the beginning of 2012, the stock price has been in a pronounced downward trend, falling 30.6 percent this year to date, and 47.97 percent year over year.

Solar PanelsE = Earnings are Increasing Quarter over Quarter

To say the solar industry is struggling would be putting it lightly. Faced with a tough global economy, a glut of supply coming out of China, low demand, and awkward supply-side government support, the industry has seen hundreds of companies shut down.

Revenue has been increasing yearly, and the company issued 2012 net sales guidance of $3.5 to $3.8 billion in its third-quarter earnings. However, a top-line miss for the recent quarter highlights the company’s dependence on revenue streams from large projects, which are time sensitive.

That sensitivity is one reason why quarterly numbers are so variable, as revenue from projects is sometimes recognized later than the costs associated with it.

2007 2008 2009 2010 2011
Revenue ($) in millions 504 1,246 2,066 2,537 2,813
Diluted EPS ($) 2.03 4.24 7.53 7.68 (0.46)

(Fiscal year is January-December.)

Sept. 30, 2011 Dec. 31, 2011 Mar. 31, 2012 June 30, 2012 Sept. 30, 2012
Revenue ($) in millions 1,006 663 497 957 839
Diluted EPS ($) 2.25 (4.80) (5.20) 1.27 1.00

 

T = Trends Support the Industry in which the Company Operates

Looking back at the stock chart for First Solar from 2007 to 2009, it’s clear when the good old days of the solar industry were. It’s also clear by looking at some of the quarterly earnings losses that the current situation is pretty bad.

A large part of the blame can be put at the general economic depression triggered by the financial crisis and collapse of the housing bubble. Despite broad support from the government, deploying solar panels requires a heftier investment, particularly up front, than generating or accessing electricity via natural gas.

However, on that note, there is a huge desire for solar energy. According to the SCHOTT Solar Barometer Survey, 9 out of 10 Americans think it’s important to develop power use, with 82 percent supporting federal solar incentives. A 39-percent majority of survey participants pegged solar as their top choice for energy, followed by natural gas.

ConclusionSolar Panels

It’s not at all obvious whether there will be another solar-industry boom in the near future. Economic recovery is slow at best, and the players that are still active are plodding along and meeting what demand there is out there. The industry is more likely to contract further and consolidate before seeing substantial growth.

The industry will particularly see consolidation in China, which has been blamed for a global over supply of panels. Instead of a swarm of smaller companies, the future may hold several key manufacturing players who manage large projects, while smaller companies are reduced to “dealerships” for residential or small-scale commercial projects.

Because of this, and because of the metrics above, First Solar is a Wait and See. The industry is still too volatile to push money into.

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