My earnings play on First Solar (FSLR) unfolded much better than expected today. The post-earnings pop took FSLR directly to my standing $149/150 price target that represents a fill of the earnings gap from October. See chart below:
*Chart created using TeleChart:
I believe the biggest catalyst for today’s 18% move was FSLR’s tremendous boost in EPS (earnings per share) guidance (click here for full earnings report). The midpoint of earnings guidance went from $6.45 to $7.05. This 9% boost is net of $0.43 of foreign exchange (FX) impact and $0.23 of other operating expenses, including about $0.10 from FSLR’s NextLight acquisition (p25 of presentation). Revenue guidance remained roughly the same at $2.6-$2.7B so margins have finally diverged a bit from the current downward trend. FSLR explained that margins increased from an improved ASP (average selling price) and product mix and the completion of its Ohio plant ramp (p16 of presentation). Total cash dropped by 10% but remains a lofty $1.02B.
FSLR’s forward P/E before the earnings announcement was about 21. With the boost in EPS guidance, traders swiftly sent the stock price to hit the same forward P/E (now sitting at 20). Given the stock has reached my technical target and maintains its rich valuation, I am going neutral on FSLR. I closed out all my bullish positions into today’s excitement. FSLR may continue higher – especially if the massive number of shorts in the stock continue to cover – but the risk/reward is no longer attractive to me. As I have stated in earlier posts, the insider-buying at late February’s bottom converted me into an on-going First Solar bull and dissuaded me from considering shorting the stock for an indefinite period.
First Solar’s results boosted the entire solar sector. However, I expect a number of today’s beneficiaries to give up today’s gains in short order as the market more precisely sorts out which companies can truly ride First Solar’s tailwinds.
Be careful out there!
Full disclosure: no positions.
I am cautious on First Solar as well though from a fundamental perspective rather than a technical one.
My main concerns remain their slow cost reductions and inflexibility in being able to add capacity during peak demand periods.
All valid concerns. I used to be bearish on FSLR for such reasons but when the stock was trading at $180 and above. The solar industry in general is still on dicey ground given the continued reliance on government largess – and a lot of key governments are running huge deficits that will need to come down at some point soon. Not to mention the political wrangling which holds things up so often here in the U.S.