First Solar Earnings Get Valuation Check (FSLR, TAN, KWT, ENER)

We have long said that this Q3 period was likely to separate the men from the boys in the solar sector.  Unfortunately, none of the men looked stronger than the boys.  Tonight’s earnings report out of First Solar Inc. (NASDAQ: FSLR) only reiterates the notion that solar power companies are in many ways just leveraged bets on the price of oil.  First Solar posted $1.79 EPS on $480.9 million in revenues (excluding the Sarnia project with $58 million not recognized in Q3).  Thomson Reuters had estimates pegged at $1.74 EPS and $528.78 million in revenues.  The company noted a cost per watt drop of 2.3%, but the gross margin dropped faster by 5.8%.  And there are other reasons to be cautious here.

First Solar is roughly 11% of the key solar ETF in the Claymore/MAC Global Solar Energy (NYSE: TAN), and that is down 3.7% at $8.32 in the after-hours session.  The Market Vectors Solar Energy ETF (NYSE: KWT) is much thinner in trading volume and is indicated lower without much volume, but First Solar is about 8.6% of its weighting.  Many have hoped for a recovery in Energy Conversion Devices, Inc. (NASDAQ: ENER), but that is down almost 4% at $11.02 in the after-hours session and that is on the heels of a 4.5% drop during the normal trading session.

The solar leader issued guidance that is very disappointing to many of the solar bulls.  Q4 revenue guidance is $550 million to $600 million vs. $534.48 million expected by Thomson Reuters.  The new 2009 revenue range is $1.975 billion to $2.025 billion.  That is at the higher-end of a prior target from the company and just meets a $2.00 billion Thomson Reuters consensus target at the mid-point.

There are other negatives here.  The company says that its module pricing for 2010 is unclear and it still sees a potential change for solar business in Germany in 2010.  Also noted was Ontario requiring significant local content.

The company has a new CEO, Robert Gillette.  None of today’s woes are Mr. Gillette’s fault nor his problem.  He is taking over after years of unfettered growth and at a time when industry margins are contracting and as sector orders are getting more and more competitive.

It is very possible that tomorrow’s trading will be different than the after-hours session today after analysts and traders break these numbers down with the full impact.  But this trades now at over 6-times expected revenues and trades at roughly 20-times 2009 earnings.  At least that was before the near-15% drop to $129.00 in the after-hours session.

JON C. OGG
OCTOBER 28, 2009