Primed for a Surge
As I mentioned, the industry’s turnaround has not come without bumps, and FSLR has felt them in its quarterly results. Last quarter, revenue fell 45.7% from a year ago to $519.8 million (a miss of $200 million), and net income dropped 69.7% to $33.6 million, or 38 cents per share. Management lowered both full-year guidance of revenue to $3.6-$3.8 billion and earnings to $3.50-$4 a share, down 50 cents per share from three months ago. The earnings figure includes an equity offering and a new deal with GE which involved some additional share count, so they are not “apples to apples” with prior periods.
Shares pulled back sharply on the August report, but have been steadily rising ever since, supported by strong fundamentals. FSLR’s project pipeline is solid, with $9 billion in projects underway. Last quarter, the company bought General Electric’s (GE) solar technology for 1.75 million shares of stock. While that diluted shareholders a bit, it also means that FSLR is partnering with an industrial behemoth, which will provide some inroads into new markets.
A third-quarter equity raise of $427 million has helped FSLR pad its balance sheet to take advantage of the push for new solar installations – especially at a time when so many smaller companies are struggling with 10% gross margins, no profits, and who are leveraged to the hilt. Net cash stands at about $1 billion, which is 25% of the current market cap, and the company kept its operating cash flow target for the year of $1 billion (this is despite the revenue miss, which was based on some timing factors). In fact, the shares trade below net tangible assets, which is attractive from a valuation standpoint, as the stock trades below the liquidation value of the company.
Due to its strong balance sheet and positive cash flow, FSLR is positioned to weather any hiccups in the solar industry far better than its peers, and is also poised to capitalize on broader sector opportunities, no matter where they arise. Scale is key, and the company should be able to continue to grow its project pipeline, while monetizing its current projects that are already in construction. Though the guidedown in August was a disappointment, management remains confident that its pushed-out projects will be realized in 2014.
Street estimates have been lowered across the board, and now the company is viewed as a “show me” story. But I already see signs that FSLR will prove itself in the coming months, using its vertical integration model to outclass the competition. The stock may require some patience for its story to play out, but I believe the company can earn $6 a share by 2015, and given even a low 10X multiple by the Street, which may be conservative given that kind of earnings growth (but allows for investor skepticism), this could be a $60 stock in a year.
As I mentioned earlier, solar stocks are vulnerable to volatility, so I am giving First Solar a risk rating of aggressive. Please keep your risk tolerance in mind before buying.