Last September, I asked whether First Solar
Since then there's been nothing but bad news for First Solar. The company announced a change in management, a shift in strategy, and lower earnings guidance.
Yesterday, when full-year 2011 earnings came out, they were worse than even the lowered guidance had anticipated. Fourth-quarter net sales were down $345 million from the third quarter to $660 million, and the company lost $4.78 per share. Earnings were negatively affected by a goodwill impairment charge for the components business, warranty expenses, and restructuring. We'll get to the red flag that brought up in a minute.
The cost lead evaporates
First Solar used to be the lowest-cost manufacturer by a wide margin. Now, Chinese manufacturers are starting to catch up, and it's showing in First Solar's financials.
First Solar said the cost per watt was $0.73, comparable to the $0.76 cost per watt Canadian Solar
Not every manufacturer can match First Solar's costs, but they're quickly catching up. When they do, First Solar is going to need to unleash higher-efficiency modules or risk losing out on even more module sales.
Between June 2008 and June 2009, First Solar made modules that experienced premature power loss in the field, and the company is paying for the mistakes right now. It posted a $125.8 million loss to add to warranty reserves to pay for replacement of modules and other costs. It doesn't appear that these costs will continue, but it's worth keeping a close eye on.
The sad solar player
Compared with SunPower, which was excited about new products and opportunities in new markets, First Solar's management sounded like a sad puppy on the conference call. Michael Ahearn referenced "draconian measures" when referencing feed-in tariff changes in Germany. Tone isn't always indicative of performance, but in this case it's just another red flag for me.
First Solar is planning to idle part of its plant in Germany for up to six months; it's going to delay commissioning its Mesa, Ariz., plant; and it's discontinuing work in Vietnam. Read between the lines, and First Solar doesn't think its manufacturing facilities have much of a future.
Revenue expectations were also revised down to a range of $3.5 billion to $3.8 billion from previous estimates. Profit is still expected to be $3.75 to $4.25 per share in 2012.
What keeps me in the game
As much as I realize the strategic weakness, I can't ignore that First Solar is one of the only profitable solar manufacturers, despite this quarter. First Solar also has a 2.7 GW systems pipeline, which will maintain earnings at a profitable level for the near future and for big-name systems backers such as NRG Energy
If First Solar wanted to make a strategic change to becoming a power-plant developer instead of a module manufacturer, it probably could and still generate a decent profit. But in the meantime, the company will keep bumping along.
If the stock jumps in the coming weeks I may cash out, but I view the downside risk as small enough to hang on to my shares. My much bigger solar bet is on SunPower, but First Solar will stay in the game despite this disappointing quarter.
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