Updated from Tuesday, Jan. 12
TEMPE, Ariz. (
is having a tough time convincing many of the clean tech analysts that it still deserves a growth stock profile. Gross margin erosion as First Solar transitions to more systems-based -- i.e. lower margin -- solar business, is one major concern. Competition from Chinese polysilicon players is also making it harder for First Solar to justify its average sales price per watt for a less efficient thin film technology.
First Solar went so far as to hold a special meet-and-greet First Solar management event in New York City in mid-December, a first-of-its-kind event for the solar company.
So it should come as welcome news to First Solar that this week, as a result of First Solar management guidance at the New York City event, an analyst has raised his price target on First Solar, by a not insignificant $10, no less. If only the analyst's previous price target had not been $90, which is $43 below First Solar's current share price.
FBR Capital Markets analyst Mehdi Hosseini has upped his price target on First Solar from a $90 to $100, in what may be one of the most bearish price target increases in recent solar market history.
To be fair, Hosseini had the $90 target on First Solar due to the lack of guidance from the company before the New York event. The First Solar management discussion, particularly as it related to its capacity expansion, fell far short of what Hosseini was looking for in terms of changing his bearish view of First Solar's earnings trajectory.
This wasn't the case with all the First Solar bears after the Westin Hotel management presentation. Mark Bachman, of Pacific Crest Securities, has argued that First Solar may no longer be a growth stock. He was also zeroing in on capacity expansion as the trigger for a sell call on First Solar stock. Bachman came away from the meeting frustrated by First Solar's capacity expansion plans, but
stopped short of recommending investors sell First Solar stock.
Hosseini's bearish First Solar outlook is worse, as it is also his best-case scenario for the company. Hosseini said in modeling his earnings per share, average sales price, gross margin and revenue numbers, he is assuming that everything goes exactly right for First Solar.
It's a big benefit of the doubt that the FBR analyst is providing to First Solar. This includes Germany not surprising the solar market with a larger than expected cut in its feed-in tariff program, which some solar analysts think is likely.
A second big risk is that a planned 30 megawatt project in China does not make it to a final contract -- currently it is only a proposal, and a proposal is a far cry from a contract. What's more, FBR Capital sees no other geography at present time where First Solar could move the 30 MW expected from the China project if for any reason it does not move ahead to construction.
Hosseini ran his model at an assumed 100% utilization rate for First Solar's capacity, and even giving First Solar the benefit of the doubt, the FBR Capital analyst does not see a bright spot for First Solar. "Even with all potential capacity in place, First Solar's earning power is still below consensus, and my estimate well below consensus," Hosseini said.
Hosseini has an earning per share estimate of $5.93 for 2010. The average earnings estimate for First Solar from the Street is $6.43.
Pacific Crest's Bachman took First Solar's plans to raise capital expenditures to between $500 million and $550 million as a sign of just-enough capacity ramp up. Hosseini said "the capacity announced by First Solar was less than I anticipated or wanted for First Solar to work as a stock with earnings upside."
Hosseini also sees the average sale price (ASP) per module as a big unresolved issue for First Solar. FBR is estimating an ASP of $1.50 in 2010, which would be a drop of 20% year over year, as First Solar is required to "aggressively lower its ASP to remain competitive as solar demand increases."
Chinese players including
Yingli Green Energy Holdings
are among the competitive threats to First Solar often cited. The FBR Capital analyst said that sources in China have indicated that the current ASP for the more efficient polysilicon module players is $1.70/watt.
"If Germany or any other geography turns out to be less than the best-case scenario in terms of feed-in tariffs, ASP has to go down even more to make up for the subsidies," Hosseini said.
Another big sticking point for the FBR analyst is the extent to which First Solar is transitioning to the large-scale solar farm business and its impact on gross margins. FBR has changed its business mix model from 94% module/6% systems business to 74% modules/26% systems business for First Solar.
FBR's estimate for First Solar's modules-based gross margin is 45% in 2010, and a systems-based gross margin of 11%, for a blended gross margin of 37.7%. For a solar stock that had a 51% gross margin in 2009, that's a big drop.
"To the credit of First Solar management, they have been upfront about the margin compression. Still, I think most analysts have yet to react with realistic margin profiles," Hosseini said.
First Solar is always focused on the return on net assets (RONA), too, and with a lower margin business mix that RONA suffers, which is why First Solar has guided investors to a less than optimal RONA of 20%. FBR has a return on net asset estimate of 16.8% for 2010.
What's more, the systems business has high engineering, procurement and construction costs (EPC). First Solar won't be able to negotiate down EPC costs until several years have passed and it has significantly ramped up the systems business, in the opinion of the FRB analyst.
In some respects, the First Solar bear Hosseini thinks that the solar company is in a Catch-22 situation relative to his outlook. He said to become a bull on First Solar, there would have to be much more solar demand globally -- current FBR projections are for supply to exceed demand by 3 GW to 4 GW in 2010. "It's a double-edged sword for First Solar. They are doing the right thing by adding capacity cautiously, but that shouldn't be a reason for the stock to be bid up by investors," Hosseini argues.
First Solar hit a three month low of $115 on Nov. 12. First Solar closed at a few cents under $133 on Tuesday, and were changing hands at $133.40 in pre-market trading Wednesday morning.
-- Reported by Eric Rosenbaum in New York.
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