First Solar Sounds Alarm Bells

The world appears to be crashing down around First Solar (Nasdaq: FSLR  ) today. After updating guidance for both 2011 and 2012, the market has hit the panic button, and shares are crashing 20% as I'm writing.

What happened
First Solar updated 2011 guidance to between $2.8 billion and $2.9 billion in revenue from a previous guidance of $3.0 billion-$3.3 billion. Earnings per share are expected to be $5.75-$6.00 per share. The company blamed the delay of certain projects "due to weather and other factors." To make matters worse, these numbers don't include $0.85 per share in impairment and other charges.

For 2012, sales are expected to be between $3.7 billion and $4.0 billion, with $1.7 billion coming from the systems business. Earnings per share are expected to be $3.75-$4.25. Management expects $900 million-$1.1 billion in operating cash flow, and $375 million-$425 million in capital expenditures for the year.

Needless to say, analysts had expected much more for both 2011 and 2012.

What it means
First Solar is beginning to be hit hard by falling module prices and a generally weak solar market right now. If I had to read between the lines, I would say that more efficient modules from competitors like Trina Solar (NYSE: TSL  ) , Yingli Green Energy (NYSE: YGE  ) , and Suntech Power (NYSE: STP  ) are beginning to become more favored as sales prices fall.

I brought this up as a major concern in September, and it's now coming to a head. The module itself is becoming a smaller and smaller portion of an installation's cost, and as this trend continues, higher-efficiency modules are more favorable.

Can First Solar make it past this?
I've hesitated to sell my shares of First Solar despite red flags because the company is still has one of the strongest balance sheets and most profitable businesses in solar. To put the company's $2.9 billion market cap into perspective, that's less than 50% more than the cost of the project development First Solar sold to Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) subsidiary MidAmerican Energy Holdings last week.

Even at the low end of 2012 guidance, shares are trading at just nine times earnings estimates. And if First Solar generates the midpoint of expected cash flow and spends the midpoint of expected capital expenditures, it will generate $600 million in cash next year, about one fifth of its market cap. Combined with the $679 million that First Solar already has on its balance sheet, the company isn't in danger of bankruptcy.

First Solar could even buy a rival manufacturer and get into higher-efficiency modules. The future is very uncertain, but I don't see First Solar fading into oblivion without a fight.

What do you think about First Solar's future? Leave your thoughts in our comments section below.

Fool contributor Travis Hoium owns shares of First Solar. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of First Solar and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of First Solar and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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