An Opportunity in First Solar?

“Earnings fine on First Solar, but stock down 20% plus. Why? They missed on the revenue number below expectations. They didn’t book full gains from a project not completed which would have put them at the top of earnings. Instead, they are at low.” — Fox Business Network Bulls & Bears 10/28/2009

First Solar (FSLR) shares are enduring a nasty sell-off in extended traded as First Solar is down more than 15% following their third quarter earnings release. The company missed revenue targets by a wide margin as sales totaled just $480.9 million, much lower than the $529 million that was expected. As we have already seen in this earnings season, companies are expected to show strong revenue growth in order to support the recovery that the market has already priced in. Apparently, the 38% growth in the quarter was simply not enough to satisfy a market with higher expectations.

Keeping the revenue misstep in mind, the rest of the quarter was not a disaster. First Solar earned $1.79 per share, which was a nickel ahead of expectations. Net income rose to $153.3 million from $99.3 million in the period last year. Gross margins slipped to 50.1% from 56.1%, but that was somewhat expected with increased pricing pressures affecting the entire solar industry. Management has a better view of sales going forward as they raised their full year revenue range to $1.98 to $2.03 billion.

Financially speaking, this was a mixed bag quarter with a large miss in revenue but FSLR was able to keep margins high enough to surpass earnings estimates. The reaction of the market in after hours trading is probably because many investors view this stock as a high growth story and any slip up in revenue decreases the attractiveness. At Ockham, we are not so quick to say that the growth story has kicked the bucket. First Solar had more than doubled revenue every year from 2006-2008, but we think it is unreasonable to expect that pace to continue. If the 4Q comes in where First Solar and analysts have it pegged, then they will have achieved growth of more than 60% on the year. That is nothing to scoff at in a year in which the global economy contracted, and many energy investments were put on the back burner as fossil fuel prices were fairly low.

First Solar is relatively young as a public company, so we just initiated coverage on FSLR within the last month. We have an Undervalued stance on this company, as we believe the growth rate is certainly acceptable at the current price level. With the stock trading below $130 in post market, there is a multiple of just 17x this year’s earnings. Furthermore, according to Yahoo finance, FSLR has a PEG ratio of 0.58 based on earnings growth estimates for the next five years. As with any investment there are risks, which for First Solar include the possibility of government subsidies coming to an end. However, at the current price level we think that this could be a risk that is worth taking after the significant sell off. The third quarter results did not hold a candle to the company’s second quarter results, but that could be to the benefit of investors looking to gain exposure to a pure-play on solar energy.

An Opportunity in First Solar?

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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