THURSDAY NIGHT'S FOURTH-QUARTER numbers are shedding some much-needed light on First Solar's business.
Shares of the solar-module manufacturer are down 7% today to $117.42, marking what could be a prolonged selloff.
The company, in fact, beat estimates and maintained its guidance for 2010, but Wall Street was looking for some additional reassurance about future demand and European subsidies for solar projects. First Solar, however, (ticker: FSLR) was unable to comply.
Last night, in summarizing the company's 2010 outlook, Chief Executive Officer Robert Gillette told investors that for the first half of the year "orders look very strong. The second half, we'll have to see." That uncertainty is unnerving Wall Street. And a lower-than-expected gross margin of 41.5% is not helping matters. A year ago, gross margins were 54%.
During the last decade First Solar grew in prominence thanks to its alternative solar modules that avoided the costly polysilicon used by rival manufacturers. But polysilicon costs have tumbled, forcing First Solar to lower prices in order to stay competitive.
First Solar shares are now down 17% since Barron's was bearish on the stock last August. (See "Powering First Solar," Aug. 17, 2009) Thursday's earnings report does little to change our opinion.
The company's 2010 earnings-per-share guidance remains a wide range of $6.05 to $6.85. Using the mid-point of that spread, shares still fetch 18 times forward earnings. Uncertainty about the solar market could compress the multiple further and a growing camp of analysts is skeptical that First Solar's 2010 guidance will stick as the year progresses.
"With risks to 2010 guidance increasing, [we] see shares in a trading range until 2010 guidance overhang is out of the way," Barclay's Capital analyst Vishal Shah wrote in a note to clients. Shah added that a multiple of 15 "on conservative $6 EPS could drive shares to the $90 levels."
Among risks is the possibility Germany will make further cuts to a solar subsidy that has helped make the country the dominant market for solar power. About 75% of First Solar sales in 2008 were to German customers. As more consumers and businesses install solar panels, the so-called feed-in tariff is becoming increasingly costly for the government and German businesses.
"It's become a political issue, it's become a budgetary issue and it's become an industry issue," says Gordon Johnson, a Hapoalim Securities analyst, who rates shares of First Solar at Sell.
Future cuts to the subsidy would significantly hurt First Solar sales. Yet on yesterday's earnings call, the company told investors it would "limit our comments and analysis about the currently being discussed changes to the German feed-in tariff, and that's in order to allow for the ongoing political debate among all the constituents to take its course. We do not believe it's beneficial to our shareholders or the industry to judge the impact of any of the proposals at this time."
We don't expect that thinking to help the company's stock. Similar to solar panels, investors don't like being left in the dark.