This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In" we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
What goes up must come down, or so the old saw says, and yesterday we saw shares of thin-film solar-module producer First Solar (Nasdaq: FSLR  ) come down in a big way. Investment banker Friedman, Billings, Ramsey knocked its rating on the stock down from "market perform" to "underperform," and the stock shed roughly 6.5% in response.

What's got FBR so hot and bothered over First Solar? In a word: margins. FBR has a lot of experience in the energy sector -- a lot of it good:

Company

FBR Said:

CAPS Says
(out of 5):

FBR's Pick
Beating S&P By:

MEMC Electronic  (NYSE: WFR  )

Outperform

****

19 points

Chesapeake (NYSE: CHK  )

Outperform

*****

88 points

Peabody Energy (NYSE: BTU  )

Outperform

*****

88 points

Drawing on that experience, FBR argues that First Solar's move into utility-scale energy projects for the nation's electric industry may not turn out as profitably as many people seem to think. Referring to the cost of First Solar's products, FBR warns that installed-system prices need to decline 14% this year, and 20% next year, in order for First Solar to compete cost-effectively for utility work. In other words, First Solar can win the work, and the revenue streams that come with it -- but it may have to accept drastically lower profit margins to do so.

The flip side
Then again, perhaps cutting margins won't be fatal to First Solar. The company currently boasts a 30% operating margin -- more than twice the wattage put out by rival Chinese solar-power play and Motley Fool Rule Breakers pick Suntech Power (NYSE: STP  ) . And if First Solar wins enough new business by cutting profit margins, it could well make up the difference, as the saying goes, "on volume."

FBR is one of the strongest analysts we track on CAPS. While it scores only a bare 51% for accuracy, the analyst ranks well within the top 15% of investors. I have to assume that FBR has considered the possibility that First Solar will "make it up on volume." Still, it wouldn't be the first time FBR miscalculated risks in the energy sector:

Company

FBR Said:

CAPS Says
(out of 5):

FBR's Pick
Lagging S&P By:

Cheniere Energy  (NYSE: LNG  )

Outperform

**

36 points

Patterson-UTI Energy (Nasdaq: PTEN  )

Underperform

****

48 points

Pinnacle Gas Resources

Outperform

**

61 points

Foolish takeaway
But when you get right down to it, I have to side with FBR on this one.

First Solar is an admirable company, don't get me wrong. But in my view, the stock is priced way past perfection. Its 46% projected growth rate notwithstanding, what we have here is a triple-digit P/E stock that hasn't generated a penny's worth of free cash flow in its life. Given those facts, I see a whole lot more downside than upside in First Solar.

Has First Solar had its day in the sun? Rich thinks so. But to find other companies just waiting to shine, check out the Rule Breakers investment newsletter service. We'll even pick up the tab for the first 30 days.

Fool contributor Rich Smith does not own shares of any company named above, but Chesapeake Energy is a Motley Fool Inside Value pick, and Suntech is a Rule Breakers recommendation. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 2,270 out of more than 105,000 players. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 22, 2008, at 11:31 AM, farhelp wrote:

    I believe the FBR analysis Is not taking into account First Solars manufacturing

    expansion in asia. This may increase FSLR's Profit Margin.

    Disclosure comment:

    I own FSLR stock.

  • Report this Comment On May 22, 2008, at 11:38 AM, Brettze wrote:

    FSLR is worth more than General Motors already

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 650495, ~/Articles/ArticleHandler.aspx, 9/15/2014 8:53:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement