Wednesday, April 30, 2008

First Solar (FSLR) Keeps Doing Enough to Satisfy Shareholders

Despite the incredulous valuation First Solar (FSLR) continues to do enough to make shareholders happy. Let me be the first to say, despite my early entry into solar (about 1.5 years ago) I've constantly underestimated this specific name, and missed the boat - we've held it in the fund briefly but since I'm not a "growth at all costs" guy, but a "growth at reasonable cost" guy, I've had a hard time holding this (similar to (BIDU) where there is no reasonable metric of valuation which explains the stock price)

My worry with First Solar is simply an expectations game - they are reaching the stage that within a quarter or two they will finally be hitting the wall in terms of "yes we are growing at an incredible rate" BUT "investors expected us to grow even more".... when that quarter happens, the momentum guys will flee en masse and you'll see a large drop off in the stock price. I thought this quarter might be that quarter since the CEO indicated in the past that 1st half 2008 would be more flattish growth....but not yet - however sequential growth (that is, one quarter out) might be "modest" per the CEO's comments today; and this stock is not priced for modest sequential growth. You can start reading between the lines in their guidance regarding this situation - while they keep raising future guidance it's not nearly the pace of "surprise" as in the past. So I still see this as a potential risk, not from a company execution standpoint but a stock standpoint.
  • First Solar Inc (FSLR) raised its full-year 2008 revenue forecast to between $975 million and $1.05 billion from its previous estimate of $900 million to $950 million, Chief Financial Officer Jens Meyerhoff told a conference call on Wednesday.
  • The company, which makes thin-film solar products, raised its expected production forecast to between 420 and 460 megawatts of solar modules from its forecast issued in February of 400 to 430 megawatts
  • Meyerhoff told the conference call the company expects its second-quarter revenues to rise "modestly" from the first quarter level.
Analysts are currently pegged at $2.53 for 2008 EPS. I'll be generous and say they can do $3.00 - the stock is priced at 100x forward earnings. And 23x revenue. I know bulls will say, that does not matter - and thus far except for a few months - it has not. I'm as big of a bull on solar in the long run as you will find (I do expect some road bumps in the next few years however), but these are not sustainable valuations. In 2009 analysts have the company growing to $5.12 EPS - I'll say the analysts are wrong and FSLR can do $7.... that means the stock is now trading at 43x estimates almost 2 years out. The "law of large numbers" will eventually hit First Solar as it has hit all great growth companies, even Mr Google (GOOG)... once you get to a certain size you cannot just keep doubling revenue every year... I think that is going to be the issue for First Solar between 2009 and 2010; growth should drop to a still excellent 40-60% range - but you are paying a much higher multiple for that earnings. Further, all it's brethren on the polysilicon side who have been hampered by sky high costs are going to see relief by that point (2009-2010) and their costs are going to fall through the floor - so the competitive atmosphere will be very different than it is now in my opinion. But that is neither here or there for now, it continues to execute and one cannot have any qualms with the scintillating growth - it's just a matter of what price do you pay for that growth? And how much more upside can we squeeze out from here? This is always our question on every stock - what is the upside potential versus downside risk - I believe risk is beginning to become more of a factor as upside surprises are becoming harder to reach (simply due to law of large numbers). Again, let me reiterate - execution has been flawless.
  • First Solar Inc. said Wednesday that first-quarter earnings spiked, beating Wall Street expectations, as the solar module maker's revenue more than doubled.
  • For the first quarter ended March 29, earnings surged to $46.6 million, or 57 cents per share, from $5 million, or 7 cents per share, in the prior year. Quarterly revenue more than doubled to $196.9 million, from $66.9 million in the first quarter of fiscal 2007.
  • Analysts surveyed by Thomson Financial forecast first-quarter earnings of 47 cents per share on revenue of $183.6 million.
  • Operating expenses jumped 83 percent to $46.2 million as selling, general and administrative expenses more than doubled.
  • The company's foreign sales benefited from the weaker U.S. dollar.
No position in First Solar, but various solar positions in fund; long in fund - no personal position

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