Our Take on First Solar (Nasdaq:FSLR) - Is Needham’s Bearish View Warranted?

Jun 07, 2010
Author: SCP Editor

June 7, 2010 – Asked this morning by a reader about my take on Needham’s outlook and comments regarding to First Solar (Nasdaq:FSLR) – initiated at UNDERPERFORM with Fair Value of $92 – here is my take:

 I am most concerned about the whole group on the euro exchange – most company guidance is based on a $1.20-$1.25 euro. If the euro continues to slip, it will mean further downward adjustments. For example, as Bachman from Auriga points out about First Solar: “A sensitivity analysis suggests that for each 0.01 move in the EUR/USD exchange rate, revenue is affected by $10 million and net income is affected by $6 million.” First Solar’s guidance is under an assumption of $1.30, we are at $1.19 this morning.

I agree with Needham’s assessment that margins will contract, and with most of its reasons for the contraction. It is a bit of a concern that module efficiency seems to be hitting a ceiling in terms of improvement, and manufacturing cost/watt has been leveling out as well. Perception will likely be that c-Si firms will start to catch up.

In terms of insulation to this risk,  I think First Solar’s balance sheet with more than $1 billion in cash and marginal debt is key. It has the potential to deploy capital strategically for higher margin/value-add opportunities. The Needham assessment is a good one, I think, on its own merit. Add to that the potential for broader market risk. The Street, and media, is starting to spend more cycles on the topic of whether we are heading for a retracement back into stronger recessionary headwinds.

That this is just becoming a media-worthy topic is remarkable, as it has been obvious for months that conditions in the labor market were nowhere near where they need to be to support GDP forecasts and S&P 500 earnings forecast that were driving stocks higher. I think a test of the 1,056 level is eminent. There are basically two lines of thinking here – the bullish one is that stocks are oversold, and this is based on expectations of S&P 500 earnings this year coming in the $75 to $85 range. At Friday’s close of 1,064, this would put the forward PE at 12.5 to 14.18. Pretty much near discounted to historical levels.

On the other hand, the labor market is so dismal, and credit markets are so unforgiving, adding to that the outlook for the housing market, that consumers will be loath to contribute the level of spending corporate America needs to achieve the kind of earnings mentioned above. In which case, I am looking for earnings this year closer to $65, and therefore, stocks don’t look oversold. They still look expensive with a forward PE of 16.36. Assuming a PE worthy of getting back into accumulation mode for stocks is at about 14, and assuming $65 in earnings this year, we would be inclined to stay on the sidelines form the buy-side until the S&P 500 dips to 910, which would be another 14% dip from here.

So broader market pressure could also be a drag on First Solar, as well as the group. It is too bad for solar companies, which generally had positive remarks in the latest round about increasing demand. That theme is getting totally drowned out now by the FX issue, as well as erosion in the European economy which has been a key driver of growth. And looking at the most recent California Solar Initiative (CSI) data, where California is basically a proxy for the U.S. market, it is a mixed bag. In May we were way down in terms of applications at 63MW (from a record 168MW in April), so this could be a signal that headwinds are picking up. On the other hand, year-to-date through May, we are at 332.59MW in applications compared to 104.44MW, a 218% positive variance.

A lot to watch.