Lights Out for First Solar (FSLR)

It's been a rough year for investors of solar bellwether First Solar (FSLR: Charts, News), which this week earned the dubious distinction as the worst performing S&P 500 component of 2012 after it reported weak fourth quarter earnings and decreased its guidance. Shares of First Solar plunged 12% on Wednesday, exacerbating the pain that the company's investors have felt repeatedly over the past four years.

In 2008, prior to the financial crisis, shares of First Solar traded as high as $311. Last year, shares seemingly stabilized around $160, before plunging even farther to the low $30s today - barely higher than its original 2006 IPO value of $20. How did one of the hottest stocks in the market, once compared to Apple (AAPL: Charts, News), fall so far and so fast?

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First Solar posted a loss of $4.78 per share, or $413 million, due to goodwill charges from its components business, restructuring costs and warranty expenses. With those one-time items excluded, the company was able to earn $1.26 per share, which still missed the analyst forecast of $1.53 by a wide margin. However, the company was one of the few solar companies to post a profit this quarter, even if it was a heavily adjusted one. Revenue plunged from $660 million to $345 million.

First Solar faces the same problem that has dogged it for the past several years - the declining appeal of its outdated technology in the face of newer, hungrier competitors. First Solar was once the undisputed low-cost leader, selling older, less efficient solar modules at the lowest possible price. That business model was flawed however, since the usage of solar power requires large amounts of land. The more efficient the solar modules are, the less real estate has to be purchased for the same amount of power.

Both Canadian Solar (CSIQ: Charts, News) and Trina Solar (TSL: Charts, News) are producing more efficient modules than First Solar at a slightly higher price. When calculated on a large scale along with real estate costs, First Solar's less efficient modules simply lose their luster. To make matters worse, Chinese manufacturers such as Yingli Energy (YGE: Charts, News) or SunTech (STP: Charts, News) are constantly producing efficient, lower cost modules, and aren't afraid of sacrificing margins to gain market share. First Solar has attempted to catch up by increasing its module efficiency by 12.2%, but still lags its industry peers since it had built an entire company upon the foundations of outdated technology. In addition, the market has become over-saturated with competitors and products, to the point that supply far outweighs demand.

The ongoing Eurozone crisis has also damaged the entire solar industry, since the world's largest consumers of solar modules - Germany, Spain and Italy - are cutting back or eliminating government subsidies to cut down on unnecessary expenditures. First Solar announced that it would idle part of its German plant for up to six months, signaling dark days ahead of the European solar market. In America, solar power has also been put on the back burner as the government attempts to avoid another debt ceiling crisis. The Solyndra debacle last September also decreased the government's appetite for pursuing large scale alternative energy projects. First Solar announced that it would delay commissioning its Mesa, Arizona plant until market conditions improve. Lastly, the company ceased all operations in Vietnam, which it had originally planned to use as a lower cost base to head off its low margin Chinese rivals.

For 2012, First Solar kept its original full-year guidance between $3.75 and $4.25 per share, but decreased its revenue forecast from $3.8 billion to $3.5 billion. On the bright side, First Solar owns a 2.7 GW systems pipeline for power plants, which serves big customers such as NRG Energy NRG. Some analysts have noted that if First Solar shifts gears completely and becomes a power plant developer rather than a module manufacturer, it could actually generate much stronger revenue and profits. Although the company's forward P/E of 7.6 and 5-year PEG ratio of 0.74 look attractive on a technical basis, investors should think twice before picking up shares of this fallen star.

Other News About FSLR
First Solar May Be in Real Trouble
First Solar may be headed for more losses in 2012.
First Solar plant delayed further
First Solar cuts back on manufacturing facilities. Other Stocks in the News
Blizzard of Loss
Activision lays off 600 as parent company Vivendi reports losses.
Is Yingli Green Energy Taking a Step Backward?
A closer look at another troubled solar company.

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Published on Mar 2, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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