was among the best-performing solar stocks on Monday, up more than 4%, or $5.55, on the day, and that may be an indication that investors are bullish on the long-term outlook of First Solar, the biggest U.S. solar company.
Should they be? Is First Solar even behaving like a technology growth stock these days?
Whether First Solar is a buy or sell may be a question investors can answer by this Wednesday.
On Wednesday, First Solar is expected to hold an earnings guidance Webcast, a mid-fourth quarter calendar event that analysts say is not typical for First Solar. One reason for the call is to introduce First Solar's new CEO, Rob Gillette, who has not previously led a conference call.
The more important reason for the atypical event organized by First Solar, however, may be that there are big questions as to First Solar's capital expenditures for 2011 -- questions that run to the heart of whether First Solar is still a technology growth company, and which First Solar may finally have the visibility to speak on.
Pacific Crest Securities analyst Mark Bachman, for one, has drawn a line in the sand, and above that line are the words "capital expenditures." Maybe there are even a few lines to underscore the importance of these words to the solar analyst.
Bachman, who issued a report on First Solar on Monday, said the planned Wednesday Webcast with new CEO Gillette should place the view on First Solar in stark relief: buy or sell, and no in between.
Here's why and how: Bachman says that the 2010 outlook for First Solar is pretty much certain; somewhere in the neighborhood of $6 earnings per share is reasonable, and that is going to be a down-but-expected message from First Solar. "I think it will be a pretty sour message they will send on 2010, that they can't bring on capacity, and if they peg earnings per share at $5 or $6, they have to give investors something to look forward to in 2011," Bachman said.
What long-term investors will look forward to is a level of capital expenditure in 2011 that proves First Solar is still a growth stock and will head back up to $8 earnings per share. "Solar is very growth-oriented, and for the time being, you have to say First Solar is still a technology growth stock, but I have concerns," Bachman said.
Bachman explained the problem in simple math: If First Solar is a $6 per earning share stock in 2010, trading at a multiple of 20x, it is more than fully valued after today's bump up to above $138 -- it has been moving up from a low point of $118 since the beginning of the month. Bachman assumes that First Solar can't bring on more capital expenditures in 2010, which means it has to bring on capital expenditures in 2011, and in a big way. "We already see the $6 priced into the stock," Bachman said.
So if First Solar is still a growth stock, the capex number needs to be big. "It takes five quarters to bring on capacity, so First Solar has to announce now for 2011," Bachman stressed.
How big does CAPEX need to be for 2011? Bachman said $700 million would provide a comfort zone for belief that First Solar was going to be able to generate the required capacity growth to increase earnings. That is based on estimating $160 million in spending across four new factories and 225 MW per factory. Bachman noted that the number could be adjusted down based on efficiencies that First Solar has achieved, but somewhere in the range of $600 million to $700 million is required.
The alternative -- with solar prices going down and only a marginal increase in capacity -- would be no alternative but to sell First Solar, in Bachman's opinion.
"Quantity is fixed, and pricing is down, and First Solar was even providing rebates in 2009, so there is no upside I can see before 2011," he said, adding, "The longer you wait, the worse it gets, and if you want to be investors in First Solar, they need to get to $8 earnings per share," Bachman said.
Lazard reportedly put out a research note today saying it only expected First Solar to project $300 million in capex in 2011. Lazard analyst Sanjay Shrestha could not be immediately reached.
While it may seem the Pacific Crest's Bachman is down on First Solar, in fact, he sees reason to believe First Solar should be able to meet his capital expenditure threshold and transition throughout 2010 back to a growth stock profile. First Solar is no longer just a module supplier, but now has its own channels through which to place modules. Therefore, if First Solar has faith in its ability to generate business and drive module sales through its own channels, it has to come out with a strong capex number for the 2011 time horizon.
Bachman, for one, is hoping the First Solar call and new CEO send a message that signals growth. "What pains me is that First Solar has a real opportunity for U.S. solar companies. SunPower still has to prove its cost structure, and everything else is coming from China," Bachman noted.
Hopefully, the pedigree of the new CEO is not an indication of the direction in which First Solar is headed as a stock. Gillette worked for both
before taking over First Solar. "The pedigree of the new CEO certainly doesn't speak to technology growth stock," Bachman noted.
And Bachman argues that if First Solar is not aggressive on the Wednesday call, being a technology growth stock is a category among which First Solar may no longer belong: "If they can't get to $8 EPS in 2011, it's a short."
-- Reported by Eric Rosenbaum in New York.
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