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.
In through the out door
Two weeks ago, First Solar
Or rather, the friendly analysts at Collins Stewart did that for them. Daring to contradict the demigods at Goldman, Collins Stewart argued last week that First Solar has fallen too far, and is bound to bounce back in short order: "Many factors have contributed to [First Solar's] weakness, including weakness in the greater solar market, a weak Q2 earnings report and guidance reduction from FSLR ... the pressure and volatility in worldwide equity markets, concerns about European sovereign debt and US economic weakness, the August 16 resignation of Jens Meyerhoff who headed the important Systems division [and] the August 8-10 significant share sale on the part of chairman Michael Ahearn." (Not to mention the swipe from Goldman.)
And yet, as a result of these worries, Collins Stewart argues that First Solar has become unreasonably cheap, pointing out that First Solar trades at 7.4 times estimated 2012 earnings, which is in line with its industry peers. The analyst believes the company should trade at a premium, though, because of a healthy project backlog along with new contracts in California and Nevada for large solar projects. And according to Collins Stewart, it's these utility-scale projects that are key to its enthusiasm for the stock, because "sales in that division are significantly more profitable" than First Solar's flagship thin-film solar modules business.
But is Collins Stewart right about that?
Let's go to the tape
Actually, no. If history is any guide, Collins Stewart is almost certainly not right about First Solar. You see, here at CAPS we've been tracking Collins' performance for close to six years now, and what we've learned is ... disturbing. Fact is, only about 43% of this analyst's recommendations ever actually manage to beat the market. And Collins' record in the two industries that represent the "solar sector" -- semiconductors and electrical equipment -- is especially bad. On average, this analyst gets 63% of its EE recommendations wrong (about twice as many as it gets right) and fails to outperform the market on fully 69% of its semi recs.
Over the years, Collins Stewart has been wrong about MEMC Electronic
First Solar: The last place to look for value
How do I know this? Let's look at Collins' analysis of the company, for starters. According to Collins, First Solar trades "in line" with its peers, right? Well, I suppose a lot depends on how you define "peers." But when I look at First Solar today, I see a company located in the "semiconductor -- specialized" industry, where P/Es currently average about 12 times earnings. First Solar, in contrast, costs 17 times earnings.
And the situation's largely similar if you base your valuations on forward multiples. Several solar stocks now trade with forward P/Es in the low single digits. By my calculations, First Solar's forward P/E is closer to 10 than to Collins' estimate of 7.3.
First Solar: Profitable ... um, where?
Collins' assertion that First Solar's utility division is its most valuable resource, too, seems off base to me. According to Capital IQ, gross profit margins at First Solar's "Systems" division have swung from as low as 7% to as high as 36% over the past three years. The company's "Components" business, however, has consistently maintained gross margins above the 50% level. In contrast, most module-makers in this industry earn profits on the level of Suntech Power
In fact, it looks to me like historically, First Solar's utility division has been responsible for pulling First Solar's firm-wide gross margin down rather than up. Far from it being the profits powerhouse Collins Stewart makes it out to be, I see the company's "utility scale" business as dragging First Solar down.
When you get right down to it, Collins Stewart's "buy thesis" for First Solar seems so totally out of sync with the numbers I'm reading that I almost suspect we're talking about two different companies. (Quick -- what's the stock symbol for "Last Lunar"?) Be that as it may, the numbers I'm looking at are unambiguous in the conclusion they command:
Based on P/E, I see First Solar selling for 17 times earnings, and pegged for 20% long-term earnings growth by most analysts on the Street. Viewed in the best possible light, this suggests only mild undervaluation, and argues against buying such a volatile stock in such an uncertain industry. Adding further uncertainty to the mix, the company's dramatic dropoff in free cash flow from inflows to outflows makes me question the quality of First Solar's GAAP earnings in the first place.
Suffice it to say that in a target-rich environment such as we see in today's stock market, I still see little reason to take a flyer on First Solar.