First Solar Lowers the Bar

Typically when companies forecast lower sales or profits, their stocks usually take a hit. It's not always easy to tell whether it's having a fire sale or burning down its house. Maybe it is time to get out -- or maybe it's time to buy more!

In the case of solar-module maker First Solar (NASDAQ: FSLR  ) , I think it's time to grab your belongings and head for the exits. Even though it was able to beat analyst profit expectations for the fourth quarter, it still fell far short on revenues, missing by about $150 million or so. And with its first-quarter outlook looking dismal -- it guided to revenues of just $650 million to $750 million, far below Wall Street's $822 million guess -- there's no reason to be optimistic that there's a turnaround in its future.

Cloudy skies
The problem is that First Solar was no longer happy being a module shop. It thought that operating on a grand scale of becoming a design-build construction firm for utility-scale solar power plants was where the growth would be, but there's precious little going on there, either.

The company had 3 gigawatts of projects in its pipeline during the third quarter, but that fell to 2.9 gigawatts by the fourth, which, when you account for those it can't yet recognize revenue on, leaves just 2.2 gigawatts in the pipeline. For all of 2012, First Solar recorded just 1.1 gigawatts of new bookings, and factoring in the 1.4 gigawatts of shipments it had, gives it a book-to-bill ratio of 0.8 when what it should be targeting at the very least is a one-to-one.

First Solar can't even begin to think about giving full-year guidance until after the second quarter is put to rest, because two projects -- the 300-megawatt Stateline Solar Farm in California and the 250-megawatt Silver State South project in Nevada -- have yet to be permitted, and trade disputes between the U.S. and India and China and Europe remain ongoing. Until all those are ironed out, or at least more clarity is provided, the solar shop has no idea how its business will fare.

Of course, we still need to dig a bit further, so don't blindly sell on these bearish signals. We'll just use the announcement as a jumping-off point for additional research.

Like lemmings over the cliff
It's no surprise why First Solar wanted to minimize its exposure to the module market. Depressed pricing from the continuing inventory glut is crushing everyone from ReneSola (NYSE: SOL  ) to Suntech Power (NASDAQOTH: STPFQ  ) .

ReneSola reported earnings last week that showed it recording its sixth consecutive quarterly loss, which widened to $50 million from the nearly $37 million loss it posted last year. As a recent Reuters story noted, solar panel prices plunged 30% in 2012 on top of a 30% tumble the year before that .

Suntech is so beaten up that it defaulted on $541 million in bond payments that were due on Friday. I noted the other day that LDK Solar (NASDAQOTH: LDKSY  ) , JA Solar (NASDAQ: JASO  ) , and Trina Solar (NYSE: TSL  ) are all in positions similar to Suntech, because they each have large bond payments coming due within the next year.

Designing a way out
To its credit, First Solar has a pretty strong balance sheet, but how long that will last is questionable. Margins are set to deteriorate as management highlighted the pricing competition it's facing on the system side of its business. It's not so much that module makers are following suit and jumping into the EPC business -- although that's happening, too -- but rather it's that traditional design-build specialists such as Fluor (NYSE: FLR  ) , which won contracts for solar parks in California and Arizona last year, are moving in and winning contracts. Large-scale solar projects may be where the money is, but everyone is moving.

First Solar has maintained its profitability thus far, but that probably will end soon, or in a greatly diminished form. This year shows substantial cracks in the foundation, and as margins wither, the solar shop's depleted pipeline will add more pressure, and I suspect we'll see its stock fall precipitously. I don't think the various financial ratios that depict First Solar as a discounted value play take into consideration this darkening future.

Low pricing, low margins, empty pipelines, and greater competition are a tough mix to go up against. I've had a long-running "underperform" rating on First Solar on Motley Fool CAPS that I don't plan on closing out anytime soon.

Despite decades of subsidies and innovation, solar power is really nowhere in meeting our energy needs and undoubtedly will never amount to much regardless of the money thrown its way. But disabuse me of that notion in the comments box below if you think there's a reason First Solar will be the first in its class once again.

Looking under rocks
Investors and bystanders alike have been shocked by First Solar's precipitous drop over the past two years. The stakes have never been higher for the company: Is it done for good, or ready for a rebound? If you’re looking for continuing updates and guidance on the company whenever news breaks, The Motley Fool has created a brand-new report that details every must-know side of this stock. To get started, simply click here now.


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  • Report this Comment On March 21, 2013, at 9:30 AM, fktw wrote:

    There are definite risks in investing in any solar company these days. However, this analysis appear to negate basic economic theory. Just because almost everyone in the industry is losing money, it does not mean everyone will keep on losing money. This is the how the free market works:

    1. There is demand for solar panels.

    2. There is currently an oversupply of solar panels.

    3. From 1 and 2, therefore, many solar companies are losing money.

    4. Solar companies losing a lot of money will go bankrupt or exit the industry.

    5. Supply will reduce and an equilibrium will be achieved.

    6. Remaining solar companies will again make money.

    It is in these circumstances that the strongest players will survive and continue to thrive once the supply-demand equilibrium is achieved. We've seen it in the auto industry at the turn of the 20th century and we'll see it again in the 21st century with solar manufacturers.

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