FSLR Looks Ready for an Earnings Pop

by Joseph Hargett | February 26, 2013 12:21 pm

Rising energy costs have once again put a spotlight on the solar sector. Unfortunately for many solar firms, government subsidies have all but run out, leaving the group to fend for itself. That said, sector leader First Solar (NASDAQ:FSLR[1]) has continued undaunted in its quest to be the premier solar power provider.

After the close tonight, investors will get a glimpse of how well First Solar has fared during the prior quarter. Wall Street is projecting fourth-quarter earnings of $1.75 a share for the firm, up nearly 39% from $1.26 a share earned a year ago.

The consensus EPS estimate has risen 2 cents over the past month, pointing toward a creeping optimism from the analyst community. But even this bullish sentiment falls well short of the whisper number of $1.85 a share, according to EarningsWhisper.com.

Revenue is seen more than doubling to $1.33 billion from $660.4 million in the same quarter last year. Annual revenue for fiscal 2012 is anticipated to come in at $3.62 billion.

Apart from optimistic fourth-quarter earnings indications, the overall sentiment outlook for FSLR is considerably bearish. For instance, data from Thomson/First Call reveals that 22 of the 26 analysts following the stock rate it a “hold” or worse, compared to just four “buy” ratings. Additionally, FSLR’s average 12-month price target of $26.45 represents a sizeable discount of 24% to the stock’s close at $32.74 yesterday.

Outside the brokerage community, short-sellers have been busy buying back their positions, but there is still a sizeable amount of short interest open on FSLR. Despite plunging more than 38% since October, short interest still accounts for a whopping 30% of the stock’s total float (or shares available for public trading). FSLR could still see a short-squeeze situation if the company banks better than expected quarterly earnings after the close tonight.

If short-sellers are nervous about a bullish post-earnings reaction from FSRL shares, options data certainly isn’t showing any such signs. Typically, short-sellers will purchase calls ahead of an unknown event in order to hedge their positions. Currently, the March/April put/call open interest ratio arrives at 1.14, with put open interest easily outnumbering call open interest in the front two months of options.

FSLR FSLR Looks Ready for an Earnings Pop[2]

From a technical perspective, FSLR is far from deserving of the negativity being levied against it. Since bottoming near $14 in July 2012, the stock has rallied more than 125% along support at its 10-week moving average. Uncertainty in the energy market has held FSLR in check in 2013, with the stock sidling below resistance near $35.

That said, the shares appear to be making a run at $35 this week, despite weakness in the broader market. One spark from the company’s quarterly earnings report tonight could be just the catalyst FSLR needs to resume its run higher.

Returning to the options pits, it appears that weekly March FSLR options are pricing in a post-earnings move of about 11%. Traders looking to take advantage of a potential earnings-related rally in FSLR shares might want to consider the April 31/34 bull call spread, which has a maximum return well within the anticipated post-earnings move.

Shortly after the open this morning, the April 31/34 bull call spread was offered at $1.44, or $144 per pair of contracts. Breakeven lies at $32.44, while a maximum profit of $1.56, or $156 per pair of contracts, is achieved if FLSR closes at or above $35 when April options expire.

At the time of publication, Hargett had no positions in the securities mentioned.

Endnotes:
  1. FSLR: http://studio-5.financialcontent.com/investplace/quote?Symbol=FSLR
  2. [Image]: http://investorplace.com/wp-content/uploads/2013/02/FSLR.jpg

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