First Solar - The Devil Is In the Details

Needham & Co., downplayed the earnings beat, saying it was expected, and said that, if anything, the lowering of revenue guidance was probably a hit to high expectations for First Solar. The bigger issue, though, in the opinion of Needham analyst Edwin Mok, is that cost reductions made by First Solar won't be keeping up with pricing pressure.

"We believe the outlook suggests FSLR will further cut price in 2H10, which we believe is below expectations given that crystalline silicon spot prices are stable in 2Q/3Q10. We continue to believe FSLR will face further pressure on gross margins going into 2011," the Needham analyst wrote.

Oppenheimer & Co. hit on another big fear, the European austerity measures in place to tackle debt and deficits, noting that First Solar hinted in its earnings call that a sizeable digression to 2010 feed-in tariff rates in the EU are still potential negatives for solar -- and, for this reason, the Oppenheimer analyst thinks the solar sector is range-bound.

The same cost reduction of five cents in the quarter that First Solar bears don't think will be good enough to keep margins up was cited by more bullish analysts as a major positive from the latest earnings.

Collins Stewart referred to the module production cost as being of "paramount importance," and argued that the 6% sequential decline has long-term ramifications for First Solar. "First Solar has widened its lead versus its peers," Collins Stewart analyst Dan Ries wrote.

Auriga Securities more or less agreed, saying that the Street has been underestimating First Solar's ability to drive down costs while increasing productivity. "First Solar has widened the gap between itself and the industry-leading cSi competitors in terms of cost... This was a major surprise because improvement has been stagnant since 3Q09."

The bears continue to see the subsidy reductions as a threat to pricing and margins, while the bulls see the First Solar cost reduction as key during the period of time when the major European solar markets are all reducing their subsidy programs, arguing that First Solar will remain "significantly profitable while facing pressure on module pricing," in the words of Auriga Securities analyst Mark Bachman.

Jefferies analyst Jesse Pichel continues to believe there will be a better price to enter First Solar shares, and expressed disappointment in a lack of outlook on First Solar's project business. "We believe a modest guide up was priced into the stock, and FSLR did not accelerate its capacity or provide clarity around its projects in 2011 -- we looked for all three."

-- Written by Eric Rosenbaum from New York.

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