Are First Solar Investors Playing With Fire?

With shares of First Solar (NASDAQ:FSLR) trading at around $55.01, is FSLR an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

First Solar is one of the most interesting stories on the planet. There are many arguments that can be made from the bullish and bearish sides. Prior to getting to positives and negatives, let’s see what the analysts think. Most of them seem to be on the fence, but there are more bears than bulls: 2 Buy, 17 Hold, 8 Sell. It should also be noted that there is a 33.4 percent short position on the stock, which indicates that there are many non-believers.

As far as positives go, last quarter’s revenue increased year-over-year, margins are solid, cash flow is strong, and increased solar modular sales helped First Solar swing to a profit for the quarter compared to a loss for the same quarter last year. First Solar has now delivered a profit four quarters in a row. In addition to that, operating expenses were down to $107.1 million from $533 million. FY2013 guidance is for revenue between $3.8 billion and $4.0 billion, which would indicate continued growth. First Solar also commented that the second half of the year should be stronger than the first half of the year.

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One big negative is that competitors are making cheaper solar panels due to a decline in the price of polysilicon. Another potential negative is that revenue has declined on a sequential basis. First Solar will layoff 150 North American employees in the coming weeks. This is after laying off 2,000 employees last year. Factory expansions have also been canceled. It’s evident that First Solar is most focused on the bottom line. This isn’t necessarily a negative for shareholders, but it does indicate that growth might not come as easy as many people think.

When it comes to company culture, it’s average at First Solar. According to Glassdoor.com, employees have rated their employer a 3.3 of 5, and 52 percent of employees would recommend the company to a friend. An above average 71 percent of employees approve of CEO James A. Hughes.

The chart below compared fundamentals for First Solar, SunPower Corporation (NASDAQ:SPWR), and SolarCity Corp. (SCTY).

FSLR SPWR SCTY
Trailing P/E 11.33 N/A N/A
Forward P/E 16.02 25.64 N/A
Profit Margin 11.37% -12.98% -73.19%
ROE 11.98% -31.00% -32.92%
Operating Cash Flow 844.80M 316.47M 146.12M
Dividend Yield N/A N/A N/A
Short Position 33.40% 29.90% 16.60%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

The industry is on fire right now. Despite First Solar’s impressive run, it has actually underperformed its peers.

1 Month Year-To-Date 1 Year 3 Year
FSLR 41.08% 74.20% 293.5% -51.14%
SPWR 118.1% 293.6% 335.4% 95.75%
SCTY 146.9% 321.5% 11.76% 11.76%

At $55.01, First Solar is trading well above its averages.

50-Day SMA 40.60
200-Day SMA 31.91
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E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio is stronger than the industry average of 0.40.

Debt-To-Equity Cash Long-Term Debt
FSLR 0.15 1.01B 562.66M
SPWR 0.80 505.59M 754.22M
SCTY 0.90 127.29M 282.15M

E = Earnings Have Weakened

Earnings have weakened on an annual basis, but revenue has consistently improved on an annual basis.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 1,246 2,066 2,564 2,766 3,369
Diluted EPS ($) 4.24 7.53 7.68 -0.45 -1.11

When we look at the last quarter on a year-over-year basis, we see a substantial increase in revenue and earnings. However, there were significant declines in revenue and earnings on a sequential basis.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 497.05 957.33 839.15 1,075.01 755.21
Diluted EPS ($) -5.20 1.27 1.00 1.74 0.66

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

There is an oversupply of solar panels, a pricing war exists, and solar panels are still too expensive. If alternative energy options become cheaper, then solar energy will be pushed to the side. Many people feel as though solar will take over and it will be the only option, but that’s not the case. This will be a long and hard-fought battle for the industry. And competitors from other industries will always be present.

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Conclusion

The stock has serious momentum right now, and the trend is always your friend – until it stabs you in the back. In the near term, First Solar is an OUTPERFORM. There could be a lot more room to run. However, there will likely be a steep correction in the stock price over the next one to two years due to declining demand.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.

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