Is First Solar Getting Too Much Love From Analysts?

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First Solar Inc. (NASDAQ: FSLR) was a winner in the days ahead of earnings, and Wednesday has proven to be a big post-earnings win for the leader of U.S. solar power. There is a serious question that needs to be addressed: Are analysts upgrading First Solar for the right reasons?

One issue that might be helping First Solar is some protectionist trends. If China and other nations can be prevented from dumping solar panels in the United States and elsewhere, it puts First Solar on a better playing field. That would account for much of the recent pop.

What is hard to fathom is that First Solar might be deemed a value stock by alternative energy investors, now that its shares were effectively cut in half prior to the recent stock recovery. The problem is that First Solar’s adjusted earnings per share (EPS) guidance for 2017 is a far cry under the earnings for 2016, and being valued at more than 60 times adjusted earnings (far worse on a net basis) hardly feels like being valued at a traditional value stock multiple.

When First Solar reported earnings, that adjusted EPS guidance for 2017 was a broad range of $0.25 to $0.75. On a net basis, which is overlooked by most analysts, First Solar’s net EPS guidance for 2017 was actually a loss: −$0.30 to −$0.40. With First Solar shares at $30.32 ahead of earnings, that is about 60 times expected adjusted earnings for 2017 — far from cheap on the surface.

Also worth consideration is that the $0.25 to $0.75 in adjusted EPS for 2017 needs to be put in context. With the year-end report for 2016 (released in February), First Solar said that its adjusted EPS were $5.17 for 2016 and $1.24 EPS for the fourth quarter of 2016.

Here are some of the analyst calls for First Solar after and ahead of earnings.

First Solar was raised to Hold from Sell at Axiom Capital after the earnings report. Also, Robert W. Baird maintained an Outperform rating while cutting its price target to $38 from $40 on Wednesday.

S&P’s CFRA maintained a Hold rating on First Solar but raised its price target. The report said:

We adjust our 12-month target price to $35 from $37, on peer-premium price-to-sales of 1.7X our 2018 view to reflect First Solar’s strong balance sheet. We raise our 2017 EPS estimate to $0.52 from $0.38 but cut 2018’s to $0.69 from $1.07. First Solar posted first quarter EPS of $0.25 vs. $1.66, beating the $0.14 consensus loss view. Sales rose 5.1%, well ahead of expectations, due to the sale of the Moapa project. While we see bookings improving in the second half (of 2017), we are wary about the pricing landscape and module-only margins. We do not see significant volume from its lower cost Series 6 modules until the second half of 2018.

Credit Suisse had just raised its rating to Neutral from Underperform on May 1, ahead of earnings, noting that protectionist policies may trump a bearish thesis. On Wednesday, Credit Suisse maintained a Neutral rating after earnings, and it has a $32 target price. It noted that pricing still stinks while First Solar’s assets are still great. The analyst pointed out that 9.4% gross margin came in below consensus despite beating expectations. Its report said:

Moapa sale notwithstanding, the implication is that pricing remains brutal and module-only earnings power limited. The unknown is of course Suniva’s trade complaint that, if successful, could drive material upside. Demand for the company’s high quality contracted backlog remains strong. As the company transitions back to percentage of completion revenue recognition for projects, results are likely to once again be volatile.

A day or two ahead of First Solar’s earnings report, Merrill Lynch had a note about the solar sector that had many cautious points. That being said, the firm saw a better valuation than most analysts:

We value First Solar at $42 based on 9.7x CY17E EV/EBITDA, a multiple below its peer SunPower (superior technology, Total backstop) and yieldco 8Point3 (US-focused, predictable growth). … Our est. pipeline value is based on a target 8% yield on the distributable cash flow after requisite financing payments we estimate the pipeline can generate for US assets, and a 12.5% yield for int’l assets which represents a reasonable discount for international assets based on yieldco valuation differentials.

On April 27, First Solar was raised to Market Perform from Underperform at JMP Securities. First Solar shares had closed up 5.3% at $28.99 on the prior day.

Also seen a week ahead of earnings was that First Solar’s short interest had increase by 1.2% to 17.83 million shares. This represented about 23.3% of the company’s float, and the days to cover had risen from four to five. In the two-week short interest period through April 13, the stock’s share price added about 0.3%.

First Solar shares were trading up over 15% at $35.07 on Wednesday’s late-morning session. First Solar’s trading volume of 11 million shares after about two hours of trading was already over three times a full day’s average trading volume. The 52-week range is $25.56 to $52.67, and the consensus analyst target price was $35.55 before the news. First Solar shares were trading under $27 just two weeks ago.