Markets & Finance

Marcial: First Solar's Bright Future


Amid worries of the recession's lingering effects, shares lost 15% in the week after a strong earnings report. That means it could be just the time to buy

When First Solar (FSLR), the world's largest solar panel maker, on July 30 announced the dazzling news that its second-quarter sales and earnings had doubled, its stock swooned, from 173 to 154 that day. Evidently, some Wall Street skeptics figured the results weren't sunny enough.

The stock has continued to weaken, closing at 146.47 on Aug. 7. During its heady days in August last year, First Solar traded as high as 283.

So what's going on? Some analysts worry that the recession and financial crisis have dampened business activity, and they're concerned about a big dent in future sales and earnings. These analysts also express concern over a price rebate program to stimulate sales, which they thought would hurt results in the second half.

But don't be misled, assert some First Solar bulls, who see the stock's decline as an opportunity to snap up shares at lower prices. That's because they expect further improvements in the company's fundamental outlook for the second half and beyond, despite the difficult industry environment. In fact, some analysts boosted their sales and profit estimates for 2009 and 2010 and, at the same time, raised their stock price target.

A Majority of Capacity Sold Through 2010

First Solar designs and makes solar modules using proprietary thin-film semiconductor technology to convert sunlight into electricity. In less than three hours, First Solar's process is able to transform a 2-by-4-foot sheet of glass panel into a complete solar module, according to Standard & Poor's Equity Research analyst Angelo Zino.

In 2008, the company generated 94% of revenues from customers in Europe, mainly Germany, which alone accounted for 74%. The rest comes from the U.S., where the company is trying to widen its reach. The company is targeting other markets as well, including China, India, and Australia.

"We continue to have a favorable view on the company and its long-term strategy," says analyst Al Kaschalk of investment firm Wedbush Morgan, who rates the stock outperform. (Wedbush Morgan does not do investment banking for First Solar.) He believes the company can remain very competitive globally in the current environment. With the majority of its capacity already sold through 2010, "we are confident in the company's ability to manage growth, market development, and operating results" in the ensuing years, says Kaschalk.

Based on the company's remarkable second-quarter results and his continued favorable outlook for 2009 and 2010, Kaschalk boosted his stock price target from 170 to 195. He also raised his 2009 earnings estimate to $7.15 a share from an earlier $7.06, and revenues to $2.02 billion from $1.98 billion. For 2010, Kaschalk upped his profit forecast to $8.84 a share from $8.49, and revenues to $2.66 billion from $2.58 billion. Those figures are a mighty leap from 2008 results, when First Solar earned $4.24 a share on revenues of $1.24 billion.

Regulatory Hurdles Hamper U.S. Growth

Kaschalk figures that his increased sales and earnings forecasts are justified by First Solar's "superior low-cost technology, sustainable first-mover advantage (as the first and biggest in the market) and an order backlog (mostly coming from utilities) that, he says, should result in an acceleration of solar installations in the second half of 2009, and in all of 2010 and 2011."

With gross margins of 56% and operating margins of 30%, First Solar is very competitive in the global market. Kaschalk believes that concerns expressed by the company, which noted economic headwinds, are based on current industry conditions. However, management, the analyst notes, "is likely being too conservative," considering the impressive sales and earnings results in 2009's first half.

Kaschalk acknowledges that widening First Solar's market in the U.S. may be hindered somewhat by the cumbersome regulatory process, particularly on the federal level, involved in getting permits for installations. But he is optimistic about some large-scale projects expected in areas like the Boulder City (Nev.) plant, where an existing power generation facility operates. First Solar operates production plants in Perrysburg, Ohio; Frankfurt, Germany; and Kulim, Malaysia.

Kaschalk says the worry among some investors that competition from China may hinder First Solar's growth is overblown. He doesn't expect Chinese competitors to match's First Solar's low module manufacturing costs over the next 12 to 18 months.

"First Solar is the lowest-cost solar module vendor, a substantial advantage in what looks like a fairly commoditized industry," says analyst Steven Milunovich of Bank of America/Merrill Lynch (which does banking for First Solar), who rates First Solar a buy. The stock price weakness, "combined with an attractive return on capital, makes for a good entry point," says the analyst. He concedes that First Solar's near-term outlook may be "less certain due to the rebate program." But "we are confident in the long term as the company is the clear industry cost leader and should maintain a return on invested capital of 20%."

Preparing for Further Growth in Demand

S&P analyst Zino says that although a difficult financial environment poses uncertainties in the solar markets, First Solar is well positioned to prosper in the intermediate term. "We anticipate management will execute and expand capacity as scheduled," says Zino, who recommends holding the stock with a 12-month price target of 180. He says the expected lower prices through rebates should be offset by higher volume and reduced manufacturing costs.

Zino expects First Solar's sales to jump 60% in 2009 and 16% in 2010 as the company continues to expand its capacity. "We think First Solar will continue to generate new orders and that utility pipelines will develop into substantial volume by late 2010 and beyond," says Zino.

In spite of the current nervousness on Wall Street about the recession, they don't deny the benefits that the economic recovery will bring to First Solar. Nineteen of 38 analysts recommend the stock as a buy, and 16 rate it a hold. Three rate it a sell.

For investors who believe demand for alternative energy will continue to rise, First Solar appears to be the stock to go with. "The Arizona-based First Solar remains arguably our top selection within the space," says Nils C. Van Liew, industry analyst at Value Line (VALU), an independent investment research outfit.

So if investors decide to ride with the bears and ignore the opportunity that First Solar now presents, they might indeed miss the stock's sunny days ahead.


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