First Solar (FSLR): Merrill Upgrades to Buy

Merrill Lynch is upgrading First Solar (NASDAQ:FSLR) to Buy from Underperform:

Upgrading to Buy – price objective is $30

We’re upgrading First Solar from Underperform to Buy, in recognition of the company’s cost reduction efforts and the resulting likely impact both on earnings and valuation. The company still faces substantial challenges, and we still see earnings declining the next several years. That said, we have pointed to excess manufacturing capacity as a problem, and the company has addressed the issue with yesterday’s announcement. Our new price objective is $30.

First Solar can’t cut its way to growth . . .

Companies can’t cut their way to growth, and First Solar’s problem with cost competitiveness still exists. We’ve written before that we expect Chinese silicon solar cell companies to have cost in the low $0.60s per watt by halfway through 2013. FSLR’s new, lower target brings the company closer, but we still see the company struggling by the time lower Chinese profit margins and the thin-film selling price discount are factored in. We think that crystalline solar cell prices could be in the low to mid $0.70s by mid-2013, and it’s not yet clear how FSLR intends to cope with that. Yesterday’s move might best be described as taking the pressure off for the intermediate term – fundamental problems remain.

. . . but better costs and a story to tell should get the stock to $30

With the moderately improved cost structure, better earnings outlook and a story to tell, we think that the stock can move to $30. That would reflect a 10x multiple of 2014E earnings, 8.5x current-year earnings excluding expected writeoffs and 8.7x EBITDA. Whether FSLR can make more progress than that depends upon management taking additional measures to return the company to a truly competitive position.

Notablecalls: This trumps the Wunderlich downgrade.

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