Will First Solar, Inc. Earnings End Their Slump This Quarter?

On Tuesday, First Solar (FSLR 2.85%) will release its quarterly report, and investors are bracing for the drop in earnings despite fairly strong results on the revenue front. As rivals SunPower (SPWR) and SolarCity (SCTY.DL) have taken stronger steps into the residential solar market, First Solar shareholders wonder if it's too late for First Solar to move beyond its focus on utility-scale solar projects and take advantage of what has been a lucrative opportunity in smaller-scale installations.

First Solar has been a longtime leader in the solar industry, with its great success in developing massive projects to help its primarily utility-company customers meet their renewable energy needs. Yet gradually, the emphasis in the solar industry has shifted toward smaller installations, and SolarCity, SunPower, and other players in solar have adapted their business models to accommodate changing trends. Will First Solar be able to take advantage of those trends in time to avoid losing its leadership position in the industry? Let's take an early look at what's been happening with First Solar over the past quarter and what we're likely to see in its report.

Stats on First Solar

Source: Yahoo! Finance.

When will First Solar earnings bottom out?
Analysts have had to downgrade their near-term views on First Solar earnings dramatically in recent months, cutting their first-quarter estimates by a third, and reducing full-year 2014 projections by nearly $1 per share. But looking out to 2015, investors expect 35% better earnings than they did a few months ago, and that has helped the stock climb by 35% since late January.

First Solar's fourth-quarter report didn't start things off on the right foot for the solar giant, as earnings and revenue both fell well below what investors had wanted to see, and guidance for the first quarter also disappointed shareholders. Even worse, the company's backlog fell, indicating weakness in its solar-module demand and showing the impact SunPower has had in driving sales of more efficient modules. Moreover, because SunPower, SolarCity, and other residential and commercial installers are using more efficient modules than First Solar's, it wasn't immediately clear how First Solar could sustain its leadership position in solar.

Yet First Solar turned negative sentiment into optimism in March, when it met with analysts and investors and gave a broader explanation of its long-term strategy. First Solar expects to boost its efficiency levels by almost half in the next four years, with costs dropping by more than a third. First Solar expects its earnings will be choppy between now and 2016, with huge earnings gains for 2015 that could subside in part by the following year. Yet even with those advances, First Solar would be behind where SunPower is now, and you can expect SunPower to make its own gains in the coming years that could continue to leave First Solar struggling to catch up.

One interesting question First Solar faces is whether its strategy of spinning out big power projects into separately traded entities of their own will draw investor interest. So-called YieldCos have gained popularity in the solar world, with the opportunity for income-generating solar investments that would appeal to dividend investors. If First Solar can have the same success in tapping the YieldCo structure that management companies have had with master limited partnerships in the broader energy space, then it could be another growth driver for First Solar.

In the First Solar earnings report, watch to see whether the company remains on track to reach the longer-term goals it set out in its investor-day presentation. With the market cooling on high-momentum stocks elsewhere in the solar industry, First Solar needs to demonstrate the viability of its strategy in order to reassure investors that recent gains aren't just a one-time phenomenon.

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