Another earnings-related presentation, another yawn from the stock market – such is the life of First Solar (FSLR).
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 had rallied over 10% into the call and, presumably, expectations were high. In after-hours trading, FSLR rallied as much as 4% to $143 before fading. 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 gave good guidance, but I do not expect the stock to break upwards out of this range in the next 6-9 months or so. I certainly do not expect FSLR to 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 range generates a forward P/E of 14.0 to 15.2 based on Friday’s closing price of $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 $162 upper price target. That price target neatly coincides with the highs from the fall of 2009. If we assume that the market in its most cantankerous mood could drop FSLR to a 12 P/E (highly unlikely in my opinion), then that generates a $105 downside risk. This target low neatly coincides with a floor for FSLR that has endured for over three years. I think the most likely range is $120-150 until a new catalyst arrives to move the stock. The weekly chart below displays the primary trading range:
*Chart created using TeleChart:
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%
Production: 2.0GW
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 over margin numbers which have been pressured by pricing competition. Presumably, RONA should be the shining metric for FSLR and show general improvement over time.
FSLR will dedicate its entire operating cash flow to CAPEX to fund the 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 be open to discussion after funding capital expenses. Interestingly, he also stated that establishing a dividend might be an even better option given the liquidity of the stock.
Here are other points I found particularly noteworthy from the conference call and the presentation (click here for both):
Pricing
- 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 500MW of uncontracted (unallocated) volumes to price aggressively in response to 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 polysilicon manufacturers – poly prices are secondary to considering the economics of driving sell-through.
- Driving utility pricing with current economics.
Margins
- Guiding underlying margin to overall flattish with 2010 (no specific margin guidance since the company is focused on RONA goals).
Miscellaneous
- 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 in France due to the September, 2010 suspension in the feed-in-tariff. FSLR is working with the French government to resolve the issue. Existing and planned sites in Vietnam and the U.S. will have capacity to pick up the slack if needed.
Be careful out there!
Full disclosure: long FSLR