First Solar Takes Key Analyst Downgrade

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Shares of First Solar Inc. (NASDAQ: FSLR) traded lower Wednesday morning following a downgrade from Buy to Hold from analysts at Argus. Since the report of earnings earlier this month, shares have dropped more than 22%, primarily as a result of questions about future earnings.

In its analysis, Argus said it had reduced its rating due to a declining project backlog and “intense” price competition in the solar energy sector. The analysts maintain their 2016 earnings per share (EPS) estimate of $4.35, but lowered the 2017 EPS projection from $4.25 to $2.50.

The analysts believe that the extension of the federal tax credit from the end of this year to the end of 2019 will reduce the urgency for customers to complete projects. That, in turn, translates into a slower revenue stream to First Solar.

Argus had some kind words for the company, however:

We continue to view FSLR as the best-positioned company in the solar industry based on three factors: its ability to remain profitable even as peers have been hurt by oversupplied markets and a lack of pricing power; its investment in cadmium telluride technology, which should provide a cost advantage relative to more commoditized technologies like polysilicon; and its positive cash flow and solid balance sheet. FSLR should also benefit over time from stricter environmental regulations on fossil fuel-based power, and increased government and public support for clean energy.

Regarding the stock price, the analysts noted:

FSLR shares have traded between $36 and $75 over the last 52 weeks and are currently toward the low end of the range. FSLR trades at 15-times our 2017 EPS forecast, in line with profitable solar peers in the same market-cap category, such as SunPower. It also trades at 0.7-times book value, below the five-year average range of 0.9-1.4, and at 1.0-times sales, below the low end of the average range of 1.2-2.0. We note that 2017 EPS estimates have fallen along with the declining project backlog, and believe that the current valuation is fair given the company’s weaker earnings visibility.

In late morning trading Wednesday, First Solar’s stock was off about 2.4%, at $37.35 in a 52-week range of $36.75 to $74.29. The consensus 12-month price target on the stock is $56.16.