These are certainly stormy times in the solar sector. In what seems like a repeat of events that occurred just a few years ago, the clouds are blocking any sunshine from reaching stocks in the sector. And those clouds have affected everyone form smaller panel players to industry stalwarts like First Solar, Inc. (NASDAQ:FSLR). For FSLR stock, the pain is hitting deep.
After reporting abysmal earnings, the solar panel and grid-scale project firm is going back to the drawing board and restructuring itself to survive the near-term pain.
While the crash in its shares yesterday hurt (and it’s continuing to fall today), in the long run that restructuring might bare some serious fruit.
As I said last time, FSLR stock is very much a long-term play.
The Clouds Get Darker at First Solar
No one likes waking up to a 13% decline after hours, only to see an additional 11% decline when the bell finally opens. Such was the case yesterday when First Solar shareholders fired-up their brokerage accounts yesterday morning. Overnight, the solar firm managed to fuel some fears that all is not right with the sector. Today, shares are still tumbling downward with a 4% drop in early morning trading.
We’ve been down this road before as the solar industry often falls victim to supply gluts. Rather an abundance of new panels hitting the market, demand is really the cause for the supply glut. China’s demand of new solar panels and projects has fallen by the wayside. That has caused panel prices to crater.
For FSLR stock, the price drop in solar modules has already begun to hurt its bottom line. During its latest earnings release, First Solar saw its revenues decline by 45% and it was forced to walk away from some money losing, utility scale solar projects. That’s a big deal as those grid-scale projects are really its bread-n-butter. FSLR was also forced to cut its guidance for the rest of 2016 and 2017.
But apparently, it wasn’t enough.
Thanks to the continued glut of panels and recent unfavorable operating environment — *cough* Trump’s presidential win — First Solar has taken the chainsaw to its business and has announced a massive restructuring effort to “kick the can” until the sun shines again.
Losses at FSLR for a Whole Year
First Solar has been a superstar in terms of panel efficiency. As a result, its modules capture more sun and are better at turning that sunshine into electricity. The problem is they are more expensive to buy. With prices so darn low for regular panels, it doesn’t make much sense for solar project developers to use FSLR’s better panels. As a result, First Solar announced plans to produce cheaper panels that aren’t as good.
But the firm has hit a road block. The glut has gotten worse and one of the cheaper designs is now too expensive.
FLSR has now abandoned plans for the Series 5 product and will bring its production of its Series 6 modules to the market earlier. However, that is still a full year away. In the meantime, its Series 4 modules will continue production and slowly phase out until the newer cheaper panels are on the market.
What does it really mean? Some big time charges and losses for the firm. FSLR now expects a loss per share of $2 to $4 this year. Just a few weeks ago, it had guided to profits of $3.75 to $3.90 per share. Those losses come from cutting 1,200 jobs and realizing pretax restructuring charges of $500 million to $700 million during the fourth quarter.
More importantly, the mid-term outlook isn’t good either as First Solar now estimates that it will see lower revenues and panel shipments during all of 2017. It didn’t give any profit estimates for the new year.
Keep in mind, FSLR already lowered its outlook when it reported earnings last time.
Look Longer-Term for FSLR Stock
The continued panel price decline and major charges at First Solar are certainly troubling. Not only for FSLR stock, but the entire industry. And for some pure-panel players, it could be their death knell. But for First Solar, this could be a real opportunity for investors.
The key to remember is that First Solar’s main focus is those grid-scale projects. The bulk of FSLR’s customer base is still utilities and major power providers — not mom ‘n’ pop rooftop firms like SolarCity Corp (NASDAQ:SCTY). A major utility has a different set of mandates. And thanks to regulation and tax advantages, when they commit to a project, it usually gets done. That’s where FSLR stock will shine long-term.
The roll-out of its newer cheaper panels will only help push more power producers into First Solar’s hands. The charges hurt today — very much so — but they also show that FSLR is willing it do what it takes to keep its competitive advantage.
The Bottom Line: If you have a longer-term timeline, the drop in First Solar shares might be a great time to snag some and put them away for a while. Solar has always been a long-term game and the recent moves by FSLR are insuring that it it’ll be around to play that game in the next decade.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.