First Solar Disappoints As Expected (FSLR)

In late June, FirstSolar (FSLR) alerted analysts that the solar market is undergoing amajor transition that will very likely squeeze the company’s margins.Investors responded by continuing the selling that started earlier inthe month. The stock finally found support at the 200-day movingaverage (DMA) (see chart below), and Sunpower’s (SWPRa) surprise earnings reportpropelled FSLR a final 10% going into its own earnings report. All thepost-analyst day losses were erased, the words of caution were longforgotten, and the thrill had returned. In preparing for First Solar’s earnings report,I claimed that the news would disappoint: "…I am also guessing thereis a high chance that FSLR’s earnings will disappoint based on thecompany’s remarks from its analyst day. The market’s reaction todisappointment will depend on the price of the stock. At $180 or $190,the stock should sell off dramatically. At $140 or so, FSLR could hangin there."

FSLR disappointed as expected, and the stock sold off asexpected, but the path downward was wild. Traders first reactedpositively to the headline news that FSLR handily beat expectations forlast quarter. The stock gyrated wildly before topping out at $192 rightbefore FSLR’s guidance confirmed what the company had already indicateda month earlier. We just got more specifics: FSLR is offering rebatesin the extremely important solar market in Germany and is activelyresponding with pricing to protect factory throughput.

The after-hours session finished with the stock at $167 or so, and bythe close of regular trading the following day the stock was downanother 8% to $154. (I posted my FSLR earnings-related trades on Twitter in real-time.I was pleasantly surprised that my entire set-up worked out so well.).Now that the dust has settled from all the dramatic price action, FSLRis just right back to its price right before SPWRa reported earnings.However, hardened solar traders and investors should recall that lastyear it was pretty common for solar stocks to pop immediately followingan earnings release only to get viciously faded after the initialexcitement wore off. From a technical standpoint, FSLR has printed thedreaded "island top." The stock looks ready to resume the previous short-term downtrend and decisively break below the 200DMA.

Analyst reaction is all over the place on FSLR,but my own "fair value" target of $130 remains in place. I suspectthere remains plenty of latent enthusiasm for FSLR’s premium valuationto keep the stock from falling too fast from here. Additionally, thegeneral market remains an important wildcard as further price increasescould drag FSLR along for the ride as risk appetites continue toexpand.

Regardless, polysilicon competitors have finally forced FSLRto defend its market share with pricing. Solar customers are well awareof the developing pricing dynamics and will likely do their part inmaintaining downward pricing pressure. Today’s pricing estimates couldbe completely undermined within months. FSLR has insisted that evenunder the most dire pricing scenario, it will retain the upper-hand.All this adds up to lower margins for everyone, and some majorshake-outs, perhaps by year-end. It probably also means that FSLR willfinally do a stock offering sooner than later to make sure it remainswell-capitalized.

First Solar

I am next looking at Trina Solar (TSL) which reports sometimelater this month. It is trading at 10-month highs around the $28.75price for its recent public offering. Despite that, it has an attractive valuation at 1.2 price-to-sales, 2.0 price-to-book, and a 12 forward P/E. The Chinese appear ready to accelerate government largesse into its solar markets, making China-based solar companies more attractive than usual.

Energy Conversion Devices (ENER) sits at the other end of the spectrum. I tried to stay bullish on ENER last year,but gave up after September prices did not hold. ENER reports on August27 and sports an attractive valuation of 2.0 price-to-sales and 1.1price-to-book. However, the forward P/E of 21 does not account for the increasing business and product risks that its thin films division (United Solar) faces.Indeed, ENER’s stock responded to FSLR’s report with an 8% drop. Thechart below shows ENER’s overall downtrend. The stock made fresh52-week and 5-year lows in early July, and I expect those levels tobreak again.

Energy Conversion Devices



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