First Solar shares are up 31% this month.
For First Solar to be worth more than a 10 times multiple -- at $44 it is currently trading at about 11 times the mid-point of its 2012 guidance -- the top line has to grow considerably from this year's expectation and the cost equation has to drop in a way that improves the bottom line considerably more than can currently be assumed.First Solar's earnings power today is still based on power purchase agreements with utilities that won't be replicated in terms of profitability, as well as Department of Energy loan guarantee economics, making it difficult to frame the financial equation in 2014 and beyond. "Once you get past 2012, First Solar has to remain low cost and grow at a double-digit rate. First Solar is worth more than $40 if they can get their cost structure down to the 50-cent per watt range, and make balance of systems cost reductions," Simko said. "There are black holes in that road map, and right now with a risk adjusted outlook for the stock, it doesn't seem great given the challenges and the market." If First Solar grows at 15% a year in the next 5 years that implies it is at an 8 gigawatts to 9 gigawatts market share a year, and that could lead to operating leverage and expense reduction, and an earnings scenario that is much higher than the $3 annual earnings which is now the bottom line view for the company. However, Simko said, "The greater than $40 scenario is not one I would advocate here." He wants to first see the company reach the 65-cent per watt cost target by the end of 2012 and bring manufacturing to 100% capacity. On the other hand, "It doesn't scream overvalued to me at $43 compared to other names, and based on the pipeline and positive income statement. There is much less cash flow than before but it's still there, so to me that makes it less of a screaming short than other names," Simko said.
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