Seriously, This Stock Is Headed for Single Digits

In December I warned that shares of solar panel manufacturer First Solar (Nasdaq: FSLR  ) were in danger of heading to the single digits, and most of my investment friends thought I was insane. Here we are just a few months later, and that CAPScall of underperform is already up 52% and more than halfway there.

I had predicted that things would get bad for the solar sector but had little clarity as to how bad. Now that I'm outside of the Fool disclosure policy's quiet period, as I had made a personal trade on First Solar in my account earlier last week, I can discuss my reasoning why I'm convinced First Solar's stock is bound to head lower.

The proof is in the pudding
You couldn't coat enough sugar on First Solar's fourth-quarter results and fiscal 2012 guidance to cover up the ugly. The company reversed a year-ago profit and lost a staggering $4.74 for the quarter, including charges. The guidance looks even bleaker.

Most of the market had been pricing with a German subsidy cutback somewhere in the neighborhood of 15%. When Germany announced two weeks ago that it'd be seeking a 30% spending curtailment on solar subsidies, First Solar got whacked. In 2010, 46% of First Solar's revenue was derived from Germany, and an ongoing crisis of confidence in Europe could sack any plans the company has of expanding production in the region. In fact, First Solar outlined plans to idle four of its production lines in Germany and cut its output by up to a full gigawatt (1,000 MW), or about 40% of its capacity.

It's the austerity, stupid!
Another major problem is no one in the solar sector has any pricing power. When the global economy was booming, polysilicon prices were exploding higher, and solar panel manufacturers could boost prices at an even faster rate. Now look at the sector. Polysilicon prices are down 59% over this period last year, and solar panel prices have nearly been halved, despite the efforts of almost every solar company to scale down its production.

Trina Solar (NYSE: TSL  ) is one of those few companies bucking the trend and attempting to boost production despite the lower solar prices. Personally, I feel it's a foolish decision, but we'll have to wait and see how it plays out for Trina. Joining the rest of the sector, LDK Solar (NYSE: LDK  ) , for example, cut its sales forecast in November by about one-quarter, given weakened demand and falling prices.

When pigs fly
Everyone keeps calling for a bottom in solar prices and admits that solar is the "wave of the future." But, point out to me the catalyst that signals solar prices are nearing a bottom and I'll show you a flying pig!

Other than solar prices' being psychologically lower than investors can remember, there's nothing to signal they won't be halved again. Solar panels are simply not economically efficient for most homeowners and businesses, and without local and government subsidies, I just don't see how the demand for solar panels will keep up with investors' hopeful expectations.

As for First Solar, I've already made the controversial call that it's headed for single digits. Let me follow that up with another bold call that it won't turn a profit in 2012. There's still too much solar panel supply glutting the market for First Solar to gain any market share, and uncertainty in Europe is the straw that will break this camel's back. Perhaps when a few more solar companies follow Energy Conversion Devices' path to the unemployment line, production capacity will fall in line with demand. However, in the meantime there are simply too many mouths and not enough food to go around.

Disagree with me? Let's hear about it in the comments section below.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He reminds you that you can't go green without running in the green first. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (3) | Recommend This Article (6)

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  • Report this Comment On March 06, 2012, at 4:07 PM, EysteinHansen wrote:

    I agree that first solar is in trouble, but I dont agree this is because of the solar market in 2012. I think you will be suprised with the number of installations when its all settled and done. (China, UK and Japan will suprise with markets.)

    No the reason why first solar is in deep trouble as of now is to be found in some factors:

    (a) problem in the heat with the CdTe thin film. They have recently paid some 125 million $ in warrenty. This is especially serious given the fact they are putting a lot of faith in india market.

    (b) Possibly increasing tellurium prices.

    (http://www.pv-tech.org/news/report_by_merchant_research_conf...

    (c) Thin film not having reduced costs significally the last two years while c-si have catched up to them in cost and is superior in effiency.

    (d) First solar has a potential bomb in that they finance a lot of own projects. What happens when they run out of money to finance the projects they have? They need to show they have a market and that others are interested.

    Having said that I belive there is a place for thin film and first solar is an amazing technology company. But in the next 2-3 years I dont see thin film catching market shares.

  • Report this Comment On March 06, 2012, at 5:13 PM, RGAnstey wrote:

    The main issue with reaching Grid Parity is the LCOE, and the main problem is that First Solar with its lower efficiency can no longer compete on price with higher efficiency poly silicon, that require less inverters, brackets, etc. Also I think you are way off on saying that Solar is no where near price parity and prices will drop another 50%. This is far from the truth. In reality solar is at Grid Parity in Hawaii and parts of California as of this year with the new module prices and the 30% tax credit. As you can see in this link at the end, the total installation cost this year in California should hit $4.50 per watt before the 30% tax credit.

    With modules now selling at less than $1 a watt and most remaining system costs avg around $2.5-3 a watt, you can see that as of this year total system costs will be at or below $4.50 a watt and at or below $3 a watt with the tax credit, ignoring any FiT in California, or Hawaii.

    So this is actually the first year of price parity in many parts of California, Hawaii, and other parts of the world where you have high retail electricity and alot of sun. So for anyone that can supply at a profit an ASP of $1 or below a watt, there will be a lot more demand than supply this year, which will form a price floor there. While you will see every solar company that can not profitably sell modules for $1 or below per watt go out of business.

    In summation I agree that First Solar is in alot of trouble, but I will argue this year will be the year you see high growth of PV installations in the US and China in which I estimate over 100% growth over 2011 installed GW in both markets.

    I guess we can talk again Q1 of 2013 to see who ends up being right, but I think you will see a return to profitability for the Tier 1 solar companies that can sell ASP between .95-$1 a watt, while producing at .80 or less a watt, followed by aggressive growth of revenue and profits year after year, 2013 onward. ASP may even move up later this year as supply drops as a result of businesses throughout the supply chain going out of business and as a result less supply than demand going forward.

    Rob

  • Report this Comment On March 07, 2012, at 11:45 PM, Clboboas wrote:

    I remember when first solar was unsinkable...... I worked their for 3 years and I never saw such flagrant money wasting. They turned the regular lunch room into something they could show on tv despite the fact most employees would rather eat in a regular lunch area not some post modern art room. They only started careing about money when she started to list. When I first started you were taken to local hospitals for blood tests (routine) in a limo. They had catered affairs for almost any reason. Then the CEO left. He made a ton of money for running the company towards the bottom of the sea. His philosophy was to build build build. Why would you do that knowing the only reason people are buying is because gov's helped foot the bill. I find it hilarious when I first sold some stock I had for 195 (most I ever saw was 230ish) now as the ships about to split in half stocks at 25 hahaha good for them. First solar is unsinkable remember? So was the titanic!

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