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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, 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.
Did he jump, or was he pushed?
Investors want to know: Did First Solar's (Nasdaq: FSLR ) CEO leave the company voluntarily, or was he kicked out the door by a board upset at the company's losing 60% of its market cap over the past year, vastly underperforming the Dow Jones Industrial Average (INDEX: ^DJI) in the process? After initially refusing to comment on CEO Robert Gillette's departure, First Solar had a change of heart upon seeing its stock slashed 25% Tuesday.
Q3 earnings were due out next week, but management decided to rip the Band-Aid off early instead. Rushing out an abbreviated "earnings" release, First Solar confirmed that, yes, earnings fell short of expectations ($2.25 per share versus a predicted $2.64); yes, they'll be pretty rotten this current quarter, too (missing targets by a buck, if not more); and yes -- this is a big part of the reason Mr. Gillette got shown the door: "We thank Rob for his service, but the Board of Directors believes First Solar needed a leadership change to navigate through the industry turmoil and achieve our long-term goals."
Color UBS unimpressed
The upfront admission seems to have assuaged investor concerns, with First Solar shares closing up 7% after Wednesday trading and surging over 15% today -- but not everyone is impressed. UBS downgraded the stock to neutral, pointing out that Gillette was only the most recent high-profile departure at First Solar: "Jens Meyerhoff, President of Utility Systems resigned in Aug. 11 and Bruce Sohn, COO resigned in April 11." Shifting deck chairs around aboard the Titanic, worries this analyst, may not be much help in avoiding the iceberg. According to UBS:
[O]nly 25% of First Solar's 3rd party module sales in 2012 (1500 MW) are contracted. We believe ... lack of execution on the cost roadmap and third party contracts beyond 2011 is a near term risk. We lower our FY12 and FY13 estimates to $6.25 and $8.00 from $10.00 and $11.00 previously.
But wait! Isn't First Solar still cheap?
At first glance, I agree that the numbers UBS is bandying about still sound pretty good. If First Solar manages to hit the analyst's new targets, this means the stock today trades for just over eight times next year's earnings, and less than seven times fiscal 2013 estimates. That certainly looks cheap relative to the 78 times forward multiple at Suntech Power (NYSE: STP ) , for example, or even the 10 times forward P/E at SunPower (Nasdaq: SPWRA ) .
Relative to other major players in the solar industry, however, First Solar looks only properly priced -- and maybe even expensive. Trina Solar (NYSE: TSL ) , for example, carries the same eight times forward multiple that UBS is now assigning to First Solar. Yingli Green Energy (NYSE: YGE ) , long a darling of the solar set, costs a slightly higher nine times forward earnings. Meanwhile, lower-tier players such as Canadian Solar (Nasdaq: CSIQ ) cost just four times the amount of profits they're expected to earn in 2012.
Foolish takeaway
Honestly, when you compare it to the depressed valuations now common across this industry, I think you can make the case that First Solar is relatively cheap or relatively expensive. It all depends on which comapnies you try to compare it to. From my perspective, though, the worries about this stock's absolute valuation remain in full force.
Free cash flow at the firm last year was a miniscule $116 million, a mere fraction of the more than $660 million it claimed as "net income" under GAAP. And while management promised yesterday that it will address the issue, "reducing capital expenditures and evaluating opportunities to reallocate overhead," it provided few details, and it gave no details whatsoever on current levels of free cash production.
As such, I'm not convinced real cash profits are going to approach the level of claimed net income any time soon. I'm not convinced the stock is anywhere near as profitable as it's been telling people it is. And judging from the recent spate of departures -- both voluntary and involuntary -- I suspect I'm not the only person questioning this company's future.
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