First Solar (FSLR) With Great News! Wait, Terrible News! Wait!

I won't be running the world anytime soon but in my synthetic parallel universe all stocks would be halted for a period of time after an earnings release - whether it be 1, 2 or 3 hours - so speculators can take the time to "read" the earnings report instead of spasmodically hitting buy or sell based on a Reuters or Briefing.com headline. I'd also encourage companies to get their conference call in, during this "window of information" time frame.

(that said, I'd also not let multi hundred page spending bills pass in Congress and then have to be signed in less than a few hours, giving no one time to read it - but I digress)

I know a few people involved in First Solar (FSLR) and what a circus ride - the stock was up some 20+ points in after hours after the initial earnings report printed (right after 4 PM). By 5 PM the stock was down. Today it's down 10%. I realize this is all fun for day traders but seriously - can't we move to a slightly more rationale market? Are time outs not good for adults? Clearly many stocks would gap down or up even after my "time out period", just as they do now but generally they'd just gap in 1 direction once all the key information points and conference call were on full display and people had time to ... (wait for it)... analyze. But that wouldn't be fun for computers, and those high end financial institutions who run the computers - so this day won't ever come.



Let's look at what caused all the confusion at First Solar, which if you are not familiar with is one of the 2 big solar companies in the US. Before we do, to better familiarize yourself with the situation and to give credit where credit is due (since we are almost always on the back of analysts) one of them gave a warning in May for what appears to be happening - the pressures of competition from polysilicon [May 26, 2009: Analyst - Some Customer(s) Switching Away from First Solar]

I know some solar fans still exist out there - while I am a fan of the "theme" over the long run, it is hard to get too cheery about specific companies since there is so much competition. [Jan 3, 2008: The Long Term in Solar]

.....this analyst call for First Solar (FSLR)... if you are not that familiar with solar this will sound like gobbligook but most of the major (and medium) sized players have technology based on polysilicon... (same idea as your computer chips). The prices in the polysilicon supply chain have been an rollercoaster causing pressure of extreme proportion to the 90%+ of public players who are on that side of the technology divide.

First Solar's process has nothing to do with polysilicon and thus has been shielded from these issues. The polysilicon bull case is eventually a glut will happen and supply/demand will come into better balance - hence cost of goods can drop through the floor allowing some serious price wars. With that said, the potential exists for many smaller to medium sized player in the polysilicon space to also die in this war - hence why this sector is very difficult to invest if you care about intermediate to long term fundamentals. Solar itself should grow quite well over time, but how much thriving can be done at an individual company level will be the question.

Recent checks indicate at least one of FSLR top customers has already switched from FSLR to a si-based module vendor for a project that is currently under construction.

So as is the order of the day - "stimulus plans" in the form of rebates were the culprit for the wild swings. Despite a very impressive out performance, the use of rebates to stoke demand caused the consternation. This is a fancy way to say "we are cutting prices" because it does the exact same thing - and so we begin the price wars I've been warning about. Again I think solar "the theme" is a good one, and it will grow. I am not the only one - Goldman Sachs is literally (I am not making this up) buying land in the Southwest to position itself for the solar future. I am sure they will gladly sell it or lease it to companies who get government subsidies to build out solar expansions. Which they will finance. (sorry, I digress again) [Jul 29, 2008: Some Minor Solar Deals]

And probably most important, the smartest kids in the room are snapping up land quietly throughout the U.S. Southwest.

• Solar prospectors tend to be as secretive about their land as forty-niners were about the veins of gold they discovered. Most bids are placed by limited-liability corporations with opaque names that conceal their ownership. And no one has been as quick to move into the Mojave - or as tightlipped about it - as Solar Investments.
• That entity, it turns out, is Goldman Sachs’s solar subsidiary. The investment bank’s designs on the desert are a topic of intense interest and speculation. Goldman declined to comment.

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But just because a "theme" is there, does not make for great investments (unless you are Goldman Sachs) - these stocks are speculative and will time to time run 100% in weeks. And then they almost always implode. Competition is fierce and until a great shakeout occurs that levels the playing field to just a few giants it is going to be messy. I said that in early 2008 and I stick with it. Doesn't mean you cannot trade around certain names for profit if you are a nimble speculator. But don't get "investing in solar" confused with "investing in solar companies" if you catch my drift.

As for First Solar - they have been the stud of the group, and continue to be - the question is the same as I listed above; how much the plunging cost of polysilicon will force them to sacrifice some profitability to keep up their growth curve.

AP chimed in:

• First Solar, the nation's largest solar panel maker, said Thursday its second-quarter profit more than doubled on strong sales of its thin-film modules. The results beat Wall Street expectations, but investors were turned off by a rebate program that would hurt company earnings in the second half of the year.
• The Tempe, Ariz.-based company reported net income of $180.6 million, or $2.11 per share, in the three months ended June 27. That compares with earnings of $69.7 million, or 85 cents per share, in the same period a year ago.
• Quarterly sales reached $525.9 million, almost double the $267 million reported for the same period in 2008.
• Analysts surveyed by Thomson Reuters expected earnings of $1.62 a share on revenue of $459.1 million.
• First Solar Inc., the largest solar company by market capitalization, has dropped its manufacturing costs by 6 cents to 87 cents per watt in the second quarter. It also boosted production as it completed a new manufacturing facility in Malaysia.
• The company said that despite falling prices, its gross profit margin rose to 56.7% from 56.3% in the first quarter. (just a ridiculously good standard compared to peers on the polysilicon side)

There was no guidance within the press release so apparently they only offered it on the conference call (I did not listen so I cannot verify) but if this 20%+ reduction in gross margin guidance is true ... that shows immense pricing pressure.

• First Solar said it still expects 2009 revenue of $1.9 billion to $2 billion and gross margins of 31 to 33 percent.
  
• Ahearn said First Solar will push its solar panels heavily in Germany, which has some of the most generous incentives for alternative energy. The company will offer rebates for its thin-film modules that are tied to its competitor's polysilicon solar modules, guaranteeing that First Solar's modules come at a discount. "We'll do what we can to defend our position in these core markets," Ahearn said.
• Company officials estimate that the rebate program would cost between $40 million and $60 million in the second half of the year. As soon as they announced it, First Solar shares started to fall in after-hours trading.
• Mark Bachman, an analyst with Pacific Crest Securities, said a solar company has never offered a rebate like this. While it shows innovation during a tough economy, it also worries investors. "People have never seen it before and they don't know how to value it," he said.
• "We're the cost leader in the industry by a wide margin, and we're going to do what we have to do," Ahearn said, adding that the duration of the program would be "flexible" and depend on market conditions. "We're willing to reduce price so long as, but not beyond when, it's necessary."
• "They say they're doing it through a rebate program, but it doesn't matter what you call it, they still have to cut prices," said Kaufman Bros analyst Theodore O'Neill. "Their best quarter is the one they just did. The margins will only get worse from here."

More analysts pile on:

• Credit Suisse analyst Satya Kumar dowgraded First Solar to "neutral" from "outperform," saying the current quarter would "be the last good quarter for a while...we expect the stock to look ahead of this peaking earnings momentum and pull back to lower levels."
• "Concerns over channel inventory and competitive pricing from some of the lower-cost crystalline module companies seem to be weighing," Canaccord Adams analyst Jed Dorsheimer said.

And more (analysts travel in packs, much like lemmings):

• The program will most likely cut away at margins, said Deutsche Bank analyst Steve O'Rourke as he maintained his "Hold" rating, raised his 2009 profit estimate and cut his 2010 earnings forecast for the company. O'Rourke expects 2009 and 2010 profit of $7.60 per share and $8.35 per share, compared with earlier estimates of $7 per share and $8.45 per share, respectively.

Now surely there will be a price where First Solar is a good value. But this is not the type of stock known in 'value circles' - its a high growth, momo stock. The bull case here is as a cost leader, they can somehow continue to drive their cost base down even lower - to help compensate for the plunge in polysilicon and hence the rebates won't hurt margins as much. But that is a lot of *ifs* and the marketplace doesn't like uncertainty. So for now, First Solar takes its medicine.

[May 11, 2009: Energy Conversion Devices (ENER) Results and Darker Times for the Solar Industry]
[Mar 14, 2009: NYT: Europe's Way of Encouraging Solar Power Arrives in U.S.]
[Feb 6, 2009: NYT - Dark Days for Green Energy]
[Dec 20, 2008: BusinessWeek - Clouds Over the Solar Industry]
[Jul 30, 2008: First Solar - You Cannot Stop Them; You can Only Hope to Contain Them]

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