North Coast Solar Stocks

July 14, 2009

First Solar is down, but is it time to buy?

Filed under: FSLR — Tags: , , , , , , — Jason @ 4:51 pm

07.14.09, 04:51 PM EDT
By Nichola Groom and Laura Isensee

LOS ANGELES, July 14 (Reuters) – First Solar Inc (FSLR), the solar power industry’s version of a behemoth, has been a darling of Wall Street since it went public in 2006 because its cadmium telluride solar panels are less costly to produce than the silicon-based cells that dominate the market.

In recent months, however, a precipitous drop in the price of polysilicon has raised questions about whether the Tempe, Arizona company can hold on to its cost advantage. In addition, a global economic recession has hampered demand for all types of renewable energy, even in the high-flying solar industry.

After a healthy runup earlier this year, First Solar’s shares have shed more than 30 percent since the beginning of May on concerns about a worldwide oversupply of solar panels and the company’s transition to garnering more sales in the lower-margin U.S. utility market.

But given the long-term bullish outlook for solar power, particularly in the United States, is now the time to pick up shares of First Solar?

Three analysts weigh in:


‘We still have an oversupply situation of modules, in general. It’s going to provide price pressure for all the (solar) names. In First Solar’s case … it’s a case where expectations are pretty high and with the weakness in the economy, the slower ramp time and permitting process with U.S. utilities hurt its stock. The other thing, too, is you have some pretty low production rates. The expectation for capacity expansion — new plants — is down fairly significantly.

‘(Today) we went to a relative rating system. My target (price) is unchanged, but we changed First Solar from a ‘hold’ to an ‘outperform.’ We continue to see opportunity to initiate or add as the negative momentum subsides in broader market trends. We think those are starting to ease but no confirmation yet.

‘There’s going to be some short-term negative trends on the stock. The sentiment is earnings estimates need to come down to reflect the current market environment. At one point many thought in Q3 we would start to see some turn up in volume and demand, and that’s just not happening. The reversal on the stock is clear that we have not gotten the recovery in the market. We still believe when all is said and done First Solar will be a survivor as the industry’s lowest cost provider. They’re a long term winner in this environment and short-term noise is bringing the stock down.’


‘We’re neutral-rated so I’m not prepared to buy the stock yet. They had their analyst day and they were pretty straightforward about explaining to people that this is a transitioning period as they prepare for large growth in the U.S. market, particularly for installations with utilities. As the business model transitions to that phase they were also upfront that margins over time do come down. They are running the business to have a fairly good return on net assets (RONA). I think that’s a great way to run the business. Getting investors to trust that and look at the model that way has caused some pressure on the stock.

‘More specifically the solar sector has pretty steep headwinds with oversupply situations. Some of First Solar’s customers in Germany have made commentaries that were certainly not bullish and neutral to negative. That happened right after the analysts’ day. In the face of all of that and then oil prices coming down recently it’s just a challenging time to try to pick a spot to own the sector, let alone First Solar. Their transitioning period is a tough time to own the stock.’


‘If we think this is a buying opportunity, then the short answer is yes. We think First Solar because of its market share leadership, it’s going to be the largest, or certainly in the top three solar producers this year, because it has the highest margin structure in the industry. So it earns better gross margins, it has the lowest cost per watt of any producer in the industry and it has the largest portfolio of utility-scale projects of any producer in the industry.

‘They also have a strong balance sheet relative to many of the other companies where there may be concerns about the ability to fund their expansion or the level of debt, for instance. First Solar has a very solid liquidity position and they have an excellent management team. So that’s half a dozen reasons why First Solar is one of our favorite stocks in the group.’


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