FSLR - First Solar: Earnings Rebound In Full Swing Patience Needed For A Momentum Upturn

2023-10-02 09:22:56 ET

Summary

• Energy equities have performed well, while solar stocks have struggled due to rising interest rates over recent months.
• First Solar is the largest vertically-integrated solar manufacturer in the US and has the potential for strong earnings growth in the future.
• The stock has improving earnings trends, and it offers an optimistic growth story, although technical indicators suggest near-term downside.
• I outline key price levels to watch as its Q3 earnings date approaches.

Energy equities have gone one way, while solar stocks have gone another. Over the past year, the Energy Select Sector SPDR ETF (XLE) is up nearly 30% on a total return basis, while the Invesco Solar ETF (TAN) is off by 33% . The two groups have historically seen bouts of tight positive correlation, but given the steep rise in interest rates since mid-July, long-duration renewable energy and tech names have lost ground to oil & gas companies that are spewing high free cash flow levels.

I have a long-term buy rating on First Solar (FSLR). It has near-term headwinds both fundamentally and technically, along with negative trailing 4-quarter free cash flow, but the profit situation looking ahead to next year and 2025 is compelling.

Oil & Gas Up, Solar Down From October 2022

According to Bank of America Global Research, First Solar is the largest vertically integrated solar manufacturer in the US. The company provides photovoltaic (PV) solar energy solutions in the US, Japan, France, Canada, India, Australia, and internationally. It uses a specialized cadmium telluride (thin film) based panel, which is different from most other panels which are silicon-based. First Solar engages in manufacturing, with revenues increasingly coming from module sales. FSLR also develops and sells downstream solar projects and has created some of the largest solar installations in the country.

The Arizona-based $17.3 billion market cap Semiconductor industry company within the Information Technology sector trades at a high 110.2 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend. Ahead of earnings slated for later this month, shares trade with a high implied volatility percentage of 48% and short interest is material but not lofty at 3.4%.

FSLR held an Analyst Day last month. It was a disappointment as the management team did not provide an upwardly revised EPS guide. Still, strong bottom-line growth forecasts were mentioned despite near-term concerns that the firm's technology lags behind its peers. Like other long-duration tech-related firms, the focus on cost control and efficiency is high right now. Analysts at BMO were pleased with the information gleaned from the event - they upgraded FSLR from Market Perform to Outperform with a $237 price target last month.

Before the Analyst Day, First Solar reported a solid earnings beat in July. The company posted Q2 GAAP EPS of $1.59 versus the consensus estimate of just $0.94 while sales grew 31% from year-ago levels to $811 million. Guidance was not far from expectations, as well. Overall, the firm continues to de-risk its operations and remains a key beneficiary of the Inflation Reduction Act - helping to secure double-digit EPS growth in the quarters and years ahead. FSLR has the potential to become a free cash flow juggernaut if it can execute well given the favorable regulatory backdrop.

2023 Guidance as of July 27, 2023

Key risks include adverse market price trends, which could lead to lower margins. Also, unfavorable trade tensions, particularly with China, could crimp business. Finally, any political shift resulting in less capture of product tax credits could soften demand for solar.

On valuation , analysts at BofA see earnings easily rising into the black this year, with continued robust growth expected in the out years. The Bloomberg consensus forecast calls for slightly less strong EPS growth versus BofA's projection, but per-share profits are seen as topping $21 according to the very latest earnings estimates. No dividends are expected to be paid on the stock and its free cash flow has been slightly negative over the past 12 months, but that should inflect positive next year. Forward earnings multiples paint a sanguine picture of FSLR's valuation.

First Solar: Earnings, Valuation, and Free Cash Flow Forecasts

If we assume next-12-month operating EPS of $12 and apply an 18 multiple (discounted relative to its 5-year average given the much higher level of interest rates) then shares should be near $216, a 25% discount based on the closing price from September.

The forward PEG ratio is quite low given the very high earnings growth rate seen, but even if we assume normalized profit growth closer to 20%, the PEG is still cheap when using out-year EPS figures. I would like to see free cash flow indeed inflect positive, though. FSLR remains somewhat expensive on a price-to-sales basis, too.

FSLR: Mixed Valuation Metrics, But Strong Growth Profile

Compared to its peers, FSLR features a weak valuation grade, but that is primarily due to the soft trailing earnings picture. It's hard to compete with the optimistic growth story, despite the near-term profitability challenges. Still, share price momentum is exceptionally weak, in my view - common among solar-industry equities. With better EPS revisions since the Q2 report, improved headline risk is in play, and further guidance hikes could come about with a strong Q3 earnings report on the horizon.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon shows a confirmed Q3 2023 earnings date of Thursday, October 26, after the close. No other volatility catalysts are expected in the near term.

Corporate Event Risk Calendar

The Technical Take

While I like the valuation coupled with robust earnings trends ahead, the chart leaves something to be desired. Notice in the graph below that FSLR put in a bearish rounded top pattern in Q2 and Q3. You might even see a head and shoulders top with the key neckline in the $170 to $174 range. So long as the stock is below that area, the bears are in control. Also take a look at the long-term 200-day moving average - it is soon to turn negatively sloped after a protracted stretch higher from August 2022 through this past quarter. Technicians are also sure to spot the bearish death cross - the 50dma has moved below the 200dma in recent days.

That's a lot of bad news, but there is support on the horizon. The $142 to $146 zone could bring about some dip buyers. That would be a solid area to get long the stock from a risk/reward point of view. First Solar's fundamental situation would have to turn particularly poor if the old earnings-related gap from late July 2022 near $75 is filled. Previous support at the neckline has likely turned into new resistance.

Overall, I see near-term downside ahead, but getting long in the high $140s with a stop under the early 2023 low could work. Of course, long-term investors may prefer to buy today and ignore the short-term noise.

FSLR: Bearish Rounded Top Pattern, Eyeing $142 Support

The Bottom Line

I have a buy rating on First Solar. The valuation situation is compelling considering the growth trajectory. Near-term technicals are bearish, but support is not too far away from the current price.

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