Wednesday, January 05, 2011

Power of the People

It will be the People’s power plant now that Guangdong Nuclear Power Development Company has signed on to help First Solar, Inc. (FSLR: Nasdaq) build a 30-megawatt solar power plant in China’s Inner Mongolia. Guangdong is on of several power generators owned by the People’s Republic of China.

First Solar had first announced the project over a year ago but struggled to meet its target date of June 2010 to begin construction. The plant has been reconfigured to a more modest 30 megawatts from a grandiose 2 gigawatts under the new arrangement with Guangdong, which will now be the majority owner and operator. That is no problem as First Solar still will supply its thin-film solar modules and there are plans to expand at a later time. Construction is now scheduled to begin in late 2011.

With the sharp turn of fortunes for First Solar’s China project it is worthwhile to review the value behind the stock. Of course, First Solar is no microcap. The market capitalization is $11.3 billion. Annual sales were $2.6 billion in the twelve months ending September 2009, providing net income of $649.9 million or $7.53 per share. The company returns a handsome 22.6% on equity.

The stock is trading at 14.6 times the consensus estimate for 2011. In December 2010, the Company surprised investors with new guidance above the prevailing estimates. Guided EPS is in a range of $8.75 to $9.50 on sales in a range of $3.7 billion to $3.9 billion. The consensus at the time was $8.61, but has since increased to $9.06. For perspective, the trailing PE for the specialized semiconductor industry is 29.0.

Interestingly, the contributions to the 2011 EPS consensus range from a low of $6.50 to a high of $10.41. The range on sales is from a low of $3.1 billion to a high of $4.1 billion. With forty-five contributors some divergence in viewpoint is expected, but these wide ranges suggest there is a great deal to argue about in the photovoltaic sector. Rising costs of production are admittedly an issue. There is potential for margin erosion as PV manufacturers run out of cost cutting measures to protect margins against higher direct costs.

Some of these pessimists have put their money on their estimates. The short interest in FSLR was 16.4 million shares in mid-December 2010, the last time short interest was reported for the stock. This represents 31% of the float for the stock. Should First Solar report better than expected results for its fourth quarter 2010, investors who are short the stock could feel that proverbial squeeze. First Solar has exceeded the consensus estimate in each of the last four quarters. With the better-than-expected guidance in December, it seems that publishing analysts are still a bit behind the curve on First Solar’s ability to generate earnings.

Those die-hard small cap investors who will not venture north of $2 billion market capitalization can still gain something from the potential in FSLR. We believe that its success can attract new investors to the sector and help expand valuations for the broader solar sector.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. FSLR is included in Crystal Equity Research’s The Mothers of Invention Index in the Solar Group.


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