On December 14, First Solar hosted a conference call to discuss its guidance for 2011. Overall, it was a relatively bullish call. However, the stock hadrallied over 10% into the call and, presumably, expectations were high.In after-hours trading, FSLR rallied as much as 4% to $143 beforefading. The next day, selling volume surged and the stock dropped 1.4%on the day.
FSLR is essentially stuck in a wide, long-lasting range. FSLR gavegood guidance, but I do not expect the stock to break upwards out ofthis range in the next 6-9 months or so. I certainly do not expect FSLRto hurdle its 2009 intra-day high of $207. Earnings guidance for 2011 is $8.75-$9.50, a 17-24% growth rate from 2010 guidance. This rangegenerates a forward P/E of 14.0 to 15.2 based on Friday’s closing priceof $132.74. If we assume that the market in its most giddy mood will pay no more than a 17 forward P/E for FSLR, then that generates a $162upper price target. That price target neatly coincides with the highsfrom the fall of 2009. If we assume that the market in its mostcantankerous mood could drop FSLR to a 12 P/E (highly unlikely in myopinion), then that generates a $105 downside risk. This target lowneatly coincides with a floor for FSLR that has endured for over threeyears. I think the most likely range is $120-150 until a new catalystarrives to move the stock. The weekly chart below displays the primarytrading range:
Here is the rest of FSLR’s 2011 guidance:
Net sales: $3.7 – 3.9B
Operating income: $875 – 975M
Operating cash flow: $1.0 – 1.1B
Capital Expense (CAPEX): $1.0 – 1.1B
Return on Net Assets (RONA): 17-18%
RONA is the only number that declined from last year’s guidance (19%in 2010) and perhaps was enough to dull market enthusiasm. FSLR has been training analysts for over a year now to focus on this number overmargin numbers which have been pressured by pricing competition.Presumably, RONA should be the shining metric for FSLR and show generalimprovement over time.
FSLR will dedicate its entire operating cash flow to CAPEX to fundthe large expansion of production capacity from 1,430MW to 2,146MW. This expenditure means that FSLR will not consider repurchasing shares.During the conference call, the CFO indicated such activity could beopen to discussion after funding capital expenses. Interestingly, healso stated that establishing a dividend might be an even better optiongiven the liquidity of the stock.
- Targeting parity with fossil fuel peaking rates for electricity:10-12cents per kilowatt-hour. At the end of 2011, FSLR will be 20-25% of that goal.
- Expecting more competitive pricing environment in 2011.
- In the near-term, not necessarily expecting any major price cuts but taking a more conservative stance on pricing.
- Pricing contracted volumes to support sell-through in order to accommodate the economics of the marketplace.
- If facing a more “dynamic” pricing environment, FSLR will use 500MWof uncontracted (unallocated) volumes to price aggressively in responseto such an environment. FSLR can contract these 500MW if it wanted to do so. (Me: competitors, consider yourselves warned!)
- Not looking at price positioning.
- Not speculating on the pricing environment for polysiliconmanufacturers – poly prices are secondary to considering the economicsof driving sell-through.
- Driving utility pricing with current economics.
- Guiding underlying margin to overall flattish with 2010 (no specific margin guidance since the company is focused on RONA goals).
- 12 projects will generate revenue in 2011, up from 3 in 2010.
- Systems business will become net cash flow positive in 2011.
- There is some uncertainty in building a 2-line production plant inFrance due to the September, 2010 suspension in the feed-in-tariff. FSLR is working with the French government to resolve the issue. Existingand planned sites in Vietnam and the U.S. will have capacity to pick upthe slack if needed.
Be careful out there!
Full disclosure: long FSLR