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What Could Curb First Solar Inc's Rally?

By Lior Cohen - Mar 31, 2014 at 2:15PM

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After breakout stock performance over the past few weeks, what challenges will First Solar face throughout the rest of 2014?

Shares of First Solar ( FSLR -3.71% ) have jumped by more than 25% year to date. Even the company's lower than excepted guidance for 2014 and its disappointing fourth quarter earnings report haven't curbed the company's rally. Has the company done so poorly in the last quarter of 2013? Let's take a closer look at its recent earnings report and see what its investors should consider when examining the company's three-year outlook.

Fourth quarter results
The company's GAAP earnings per fully diluted share reached $0.64 and its non-GAAP earnings per diluted share of was $0.89. In comparison, leading analysts expected non-GAAP EPS to reach $0.99. The table below summarizes the company's performance in the last quarter of 2013, 2012 and annual results in 2013 compared to its guidance. 

Data from First Solar

As you can see, the company missed its 2013 goals. This was mainly due to lower than expected revenue in the last quarter of 2013. Furthermore, First Solar's operating profit margin was also lower than anticipated in 2013. The company recently released a three-year outlook, which included revenue, earnings per share, and operating cash flow. Since First Solar wasn't able to reach its goals in 2013, this long-term outlook should be taken with a grain of salt. 

Guidance for 2014
First Solar expects an increase in revenue from $3.3 billion in 2013 to around $3.85 billion in 2014 -- this comes to a more than 16% rise, year over year. In comparison, the demand for solar energy is expected to rise by more than 34% according to the Energy Information Administration. One reason that the company won't match the growth in the market's demand for solar power is the potential decline in prices for solar panels due to stronger competition and innovation. This may explain the company's expected decrease in gross and operating profitability in 2014 compared to 2013. The table below summarizes the company's performance in 2013 and its 2014 outlook. 

Data from First Solar

Despite the expected lower operating cash flow in 2014, First Solar still aims to maintain its capital expenditure well above $300 million in order to keep improving its panels' efficiency. The company also plans to expand its reach to new markets; according to one report, First Solar's TetraSun, a start-up it acquired back in early 2013, is expected to roll out its panels later this year. These panels are better fitted to the residential rooftop market. 

First Solar investors remain optimistic about the company's future growth. The company is making great strides toward increasing its sales and reaching new markets via start-ups or partnerships, like the one it has with General Electric. Moreover, as long as the demand for solar power continues to rise, First Solar will benefit and keep growing. The strong competition and ongoing decline in prices of solar panels could curb its growth in revenue and slash its profitability, however. First Solar's three-year outlook should be taken with a grain of salt, since it's hard to get things right over a one-year span, let alone over three years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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