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Solar Earnings: Buyer Beware (Part 1)

First Solar reports after the market close on Thursday, but it is already clear what issues in solar will dominate beyond this earnings season 2010 guidance.

TEMPE, Ariz. (


) --

First Solar

(FSLR) - Get First Solar, Inc. Report

reported its earnings after the market close on Thursday -- the second big solar earnings of the season -- following the bullish earnings last week from

JA Solar



But first, a bit of background: There seems to be something of a disconnect between what was already known, heading into the solar earnings season, and what the reaction has been from investors -- at least, judging from last week's JA Solar earnings. Analysts and investors have widely expected a big fourth quarter from solar companies, as well as a bullish outlook on the first quarter.

Many analysts also hold the view that given the uncertain outlook concerning many feed-in tariff regimes in Europe, and the continuing concerns of the supply-demand imbalance in solar, visibility for the second half of 2010 is all but impossible.

Therefore, it might seem there is little reason -- or rationale -- to view these quarterly solar earnings as anything of import to the solar outlook. Nevertheless, investors poured into solar shares and JA Solar last week after its earnings and bullish 2010 guidance.

In First Solar's case, there may be even more reason to disregard much of the earnings power, as First Solar management held an investor day in New York City in mid-December during which they provided their 2010 guidance.

First Solar did, as expected, reiterate its previous guidance in its earnings release after the close on Thursday.

Adam Krop, analyst at Ardour Capital Management, said that because the expectation was that First Solar would exceed expectations for the fourth quarter, "First Solar's fourth quarter earnings are not a big deal, its' the margin performance and 2H10 demand outlook that will be on the minds of investors."

First Solar already built in a degree of feed-in tariff risks to its mid-December assumptions. In its earnings presentation posted on its web site on Thursday, First Solar added that global supply will likely exceed demand in the second half of the year, and that silicon module pricing is likely to decline further in the second half. Shares were down 6% in the after market session on Thursday after the First Solar earnings outperformance, too.

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As expected, the fourth quarter was good to the U.S. bellwether solar stock. First Solar beat street estimates on both fourth quarter revenues and earnings per share in its after-market earnings report on Thursday.

First Solar had earnings per share of $1.65 per share in the fourth quarter, versus a street estimate of $1.52.

First Solar fourth quarter revenues of $641 million bested a street call of $581 million.

Strong earnings from solar companies has been the anticipation of most street analysts. Even analysts who have been more bearish on First Solar, such as Mehdi Hosseini of FBR Capital Markets, wrote in his First Solar preview, "We expect the company to meet or exceed our in-line with consensus revenue and earnings per share estimates."

First Solar net income for the fourth quarter was $141.6 million, compared to net income of $153.3 million or $1.79 per share in the third quarter of fiscal 2009, and net income for the fourth quarter of fiscal 2008 of $132.8 million or $1.61 per share.

The JA Solar and First Solar earnings and guidance provide solar investors with some important issues to think about as they attempt to wade through all the information, and uncertainty in solar. The bull and bear arguments -- and the arguments in between -- are clearly delineated headed into the rest of the solar sector reports in late February and early March.

The most fundamental argument over the current solar earnings season is whether there is any reason to pay any mind to guidance from solar companies, given the sector's spotty track record in prior years, and, what's more, fears that visibility for the second half of 2010 is particularly tricky given the European feed-in tariff battles.

Paul Leming, an analyst Soleil Securities/Princeton Tech represents one side of the argument about solar guidance, saying: "There is no visibility in this business beyond six month, so why pay attention to solar guidance? Across the board guidance beyond the next quarter in solar has been worthless." In particular, Leming noted that full year guidance being given at a year's outset is particularly troublesome to place confidence in.

Leming is clearly not one to mince his words about the relative import of solar guidance. And there is good reason to at least be skeptical. Since JA Solar was the first to report in 2010, let's take a look at how JA Solar did at the outset of 2009 in predicting its year.

In its first earnings report of 2009, JA Solar predicted revenues of between U.S. $1.5 billion and $1.7 billion. In its earnings report this month providing the revenue figure for 2009, the actual revenue number was $533 million. JA Solar (only) missed its revenue guidance by $1 billion, or two-thirds of its estimate.

To be fair, there have been quarters in the past during which JA Solar came much closer to its actual revenues in its guidance, and even quarters during which it under-estimated. Rob Stone, an analyst with Cowen & Co. -- which does not specifically cover JA Solar -- said that he believes there is more reason to believe that for 2010 solar companies can more confidently predict what the full year outlook will be than in 2009, when the financial crisis continued to muddy the picture across industries.

Nevertheless, with the tariff situation in Germany -- which represents 50% of the solar market -- still not resolved, that seems a debatable point. What's more, in missing its revenue guidance by one billion dollars in its first quarter guidance last year, JA Solar's guidance provides investors with reason to view full year 2010 guidance from solar companies with a skeptical bent.

Price reductions are the next important factor in solar management discussion, and average sales price (ASP) reductions will be tied directly to the fallout from the German tariff reductions. JA Solar estimated that ASPs would be down by 10% to 15%. Let's call that 12.5% for the sake of argument.

NOTE: This is part one of two-part story on important solar earnings season issues. For the second part, click: Solar Earnings: Buyer Beware (Part 2)


-- Reported by Eric Rosenbaum in New York.

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