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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Buy or sell First Solar?
Last week was a busy one for solar-power investors. Among other happenings, SunPower (Nasdaq: SPWRA) reported a massive, $3.77-per-share loss and ditched its CFO. Then thin-film specialist First Solar (Nasdaq: FSLR) filed a 10-Q with the SEC, providing all the gory details previously hinted at in last month's preannouncement.
The news led to a schizophrenic break on Wall Street. On one hand, Lazard Capital argued that despite a "challenging" price environment, "First Solar's best-in-class cost structure and its large-scale systems pipeline should generate significant cash flow over the next 3-5 years." As other analysts marked down their earnings projections, Lazard hoisted its own estimates higher -- not just for this year ($7.00) but for 2012 as well ($8.15).
In the opposing corner, ThinkEquity was pondering less positive thoughts. Downgrading both SunPower and First Solar to "sell," ThinkEquity predicted First Solar shareholders in particular will see "declining margins and earnings over the next two years." This being the case, ThinkEquity cut its price target to $41 per share "to reflect the potential for additional estimate cuts and price pressure."
So what is an investor to make of these conflicting ratings moves? Who's right? Lazard or ThinkEquity?
Let's go to the tape
You've already heard what's happening at First Solar and SunPower. Let's take a step back now, run down the rest of the solar news, and see if we can shed some light on the issue.
We begin with polysilicon, the base material from which traditional solar panels are constructed. According to Bloomberg, the price of this raw material has been falling steadily since August and is approaching 2004 levels. Now, you might think this would be good news for solar companies, but that's not necessarily so.
Wafer makers MEMC Electronic (NYSE: WFR) and LDK Solar (NYSE: LDK) are reporting "further deterioration in pricing" and warning of profit declines in Q4. As prices per wafer fall, LDK says it will triple polysilicon production capacity -- making it up on volume, as it were.
China's lament ...
Lower wafer prices should, in theory, be good news for companies like China Sunergy (Nasdaq: CSUN), which build solar cells and modules from them. But that's not the way things are working out. To the contrary, C-Sun just warned investors that it's expecting to book a negative 14% gross margin on its sales this quarter. Prices on its products have fallen so far, so fast, that even with the lower wafer costs, it's losing money on a gross basis ... before even accounting for operating costs.
... and America's, too
This doesn't bode particularly well for First Solar, which has historically been able to rely on the lower cost of its thin-film solar products to beat traditional solar panel makers on price. While the company's still pulling down good revenues for major utility-scale projects such as the 66 megawatt "Alpine" deal it just signed with NRG Energy (NYSE: NRG), declining prices on its products has forced First Solar to delay new factory openings in an effort to cut costs, which is likely to delay its revenue growth.
And it gets worse. Across the country, industrial behemoth General Electric (NYSE: GE) is gearing up to compete with First Solar in the thin-film market. GE predicts that within 10 years, it will be pulling down $1 billion annually in thin film revenues.
Foolish final thought
At the risk of stating the obvious, none of this sounds particularly good for First Solar. Competition is heating up, even as pricing power erodes. You can already see the damage this is wreaking on the company's financials. In the 10-Q report First Solar filed last week, we see that operating cash flow at the company, strongly positive last year, turned negative in the first nine months of this year. Capital spending is a runaway freight train, rising 63% from last year's levels.
Combine the two trends, and First Solar -- operating nearly breakeven one year ago -- is today deeply in the red on a cash profits basis. At its current run-rate, the company is on track to burn through more than $870 million in cash by year's end. Unless it gets its act together soon, this raises the specter of a debt increase, or dilutive share issuance, in 2012.
Maybe I'm just being pessimistic here, but I think ThinkEquity is right to get out of the stock before this risk materializes.
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