Should First Solar Be Valued at Less Than 12 Times Earnings?

Print Email

Solar energy was supposed to be the next great frontier for alternative and renewable energy fans. Fossil fuel is supposed to be bad, and the coal industry has seen its major companies gutted, with many having to resort to bankruptcy due to untenable losses. Unfortunately, investors have had a hard time actually making any sustained profits that would propel more alternative and renewable energy companies to enter the public markets.

Now First Solar Inc. (NASDAQ: FSLR) has maintained its lead in the United States. The company has a spotty history around earnings and guidance. Independent research firm Argus just maintained its Buy rating on Wednesday, but it slashed the price target by about one-fourth in that same call.

24/7 Wall St. cannot help but ask: Is it fair for First Solar to be valued at less than 12 times current year earnings? Keep in mind that earnings are expected to resemble the past, with wide degrees of fluctuation. It may sound different if questioning whether a $5 billion market cap undervalues or fairly values First Solar’s prospects ahead.

Argus cut its price target to $66 from $90. Several key issues are driving the Buy rating, here despite the price target cut:

  • The company has been able to remain profitable, even as its peers have been hurt by oversupplied markets and a lack of pricing power.
  • It is investing in its cadmium telluride technology, which should provide a cost advantage relative to more commoditized technologies like polysilicon. This technology is becoming cost-competitive in some markets even without subsidies.
  • Despite a recent decline in cash, First Solar has a solid balance sheet and is cash flow positive.
  • The recently announced yieldco partnership with SunPower should provide additional opportunities for the company to monetize projects.
  • It should also benefit from stricter environmental regulations on fossil fuel power, as well as increased government and public support for clean energy.
  • Its technological investments have enabled it to lower the cost of solar generation on a per-watt basis and to expand its opportunity set of utility-scale projects.

The Argus report said:

We view First Solar as the best-positioned company in the solar industry based on its profitability, cost-effective technology, and strong balance sheet and cash flow. … On April 27, First Solar reported 1Q16 revenue of $848 million, down from $942 million in 1Q15. The decrease was driven mainly by the timing of revenue recognition across multiple projects, partly offset by higher revenue from the Desert Stateline project. … Management has raised its 2016 EPS guidance to $4.10-$4.50 from $4.00-$4.50, up ten cents at the low end of the range, and reiterated its sales forecast of $3.8-$4.0 billion. We are maintaining our 2016 EPS estimate of $4.35 and our 2017 estimate of $4.25; both estimates are above consensus. … Although we remain optimistic about the company’s long-term earnings prospects, we expect First Solar’s financial results to be uneven on a quarter-to-quarter and year-to-year basis due to the timing of revenue recognition for large-scale projects.

One issue driving such a low valuation from Argus and from other analysts is that spotty earnings history and the spotty forecast. Thomson First Call has the consensus earnings estimate of $4.20 per share in 2016, but that is expected to fall to $3.18 per share in 2017.

Longer term estimates become much trickier for a consensus basis. After all, many analysts cannot even model this year or next year properly, so projecting 2018 or 2019 can be like playing darts with a blindfold. That being said, First Solar’s consensus earnings estimates are listed as $4.04 per share for 2018 and $3.57 for 2019.

Being valued at less than 12 times earnings sounds cheap. Still, the spotty history and expectations make it very hard to know if First Solar will do much better than expected or if it will fall short.

First Solar’s stock was up 1.8% at $49.39 in late-morning trading on Wednesday. The 52-week range is $40.25 to $74.29, and the consensus analyst price target is $74.34. As far as how the old $90 price target would have looked versus today, the absolute highest analyst price target is $92.00.