Why First Solar (Nasdaq: FSLR) Stock Is Oversold

The outlook for First Solar Inc. (Nasdaq: FSLR) stock is not as dark as these analysts think...

FSLR stockFSLR stock took a 7.28% hit Tuesday after a brutal downgrade by RBC Capital Markets. FSLR shares closed at $51.06, down $4.01 on the day.

RBC analyst Mahesh Sanganeria warned that Tempe, Ariz.-based First Solar would not meet its revenue and profit targets this year and next. And he whacked his 12-month price target from $54 to $34.

That's a far cry from the consensus one-year target for FSLR stock of $62.77.

We think Sanganeria's take is overly negative. But let's look at why he's so down on First Solar stock.

What's Behind the FSLR Stock Downgrade

Mainly, the problem lies with First Solar technology.

You see, the panels that First Solar makes use cadmium telluride rather than the crystalline silicon used by most of its rivals. That makes First Solar's panels cheaper, but also less efficient at converting the sun's energy into electricity.

Sanganeria believes that falling prices for silicon panels represent a major threat to First Solar's business.

"First Solar may lose its cost advantage for the whole system compared to competitors using multi-crystalline silicon technology," Sanganeria wrote.

He also voiced concern over First Solar's reliance on utility-scale projects, which have preferred First Solar's cheaper panels.

And then there's the company's Q1 earnings report released at the end of April. The loss of $0.62 per share badly missed estimates for a loss of just $0.18. Revenue of $469.21 million was short of the company's own forecast for sales of $550 million to $650 million.

That news dropped FSLR stock by 3.8%.

In fact, First Solar stock is down 21% since that earnings report. For FSLR investors, it's been a crazy nine months, with the stock going as high as $73.78 in September and as low as $39.18 in January.

But while it's true the solar industry is more unpredictable and volatile than most, First Solar is not the basket case that Sanganeria described in his note...

Why FSLR Stock Is a Bargain Right Now

Let's start with First Solar's panel technology and its prospects.

Sanganeria apparently discounted First Solar's progress in raising the efficiency of its cadmium telluride panels. While still short of that of silicon-based panels, First Solar has narrowed the gap. The higher efficiency makes the drop in prices of silicon panels less of a threat.

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First Solar also said improvements in manufacturing and an increase in capacity also would allow it to keep lowering its own prices.
"We feel that we are well positioned to compete with any commercial crystalline silicon technology available," First Solar CEO Jim Hughes said in the April 30 conference call.

More importantly, First Solar so far hasn't seen any hint of the sales slowdown Sanganeria fears.

"We are virtually sold out for 2015 and we're increasing our contracted volumes for next year," Hughes said.

Meanwhile, First Solar has a hedge against silicon panels eating away too much of its business. In 2013 it bought California startup TetraSun, which had developed a technology for making cheap, efficient silicon cells. First Solar started to ramp up production of the TetraSun cells earlier this year.

First Solar has also undertaken several initiatives to prepare for the expiration of the Investment Tax Credit at the end of 2016. The lost credit will drastically reduce incentives for U.S. utilities to build solar power installations.

That means First Solar needs to grow its sales outside North America - and it has already started doing so...

Replacing U.S. Business Will Be Key for First Solar Stock

FSLR is already working on major projects in Japan and India, two markets with a growing appetite for solar power.

An even more promising move is a new alliance with Caterpillar Inc. (NYSE: CAT). As part of the deal, First Solar will build a "microgrid" package for use by small communities and mine sites.

Caterpillar will sell and support the product exclusively under its own brand. The key here is that Caterpillar will sell the First Solar-made microgrids through its global distribution network, making it available in Africa, Latin America, and Asia.

First Solar has also moved to protect its long-term profitability by entering into a joint venture "yieldco" with SunPower Corp. (Nasdaq: SPWR). A yieldco is similar to the master limited partnerships popular in the oil and natural gas industries in that it allows profits to "pass through" to shareholders.

The companies will jointly own the yieldco, 8point3 Energy Partners, which they have registered for an initial public offering. The idea is to use the yieldco as a way to fund projects more cheaply while avoiding having to sell them. The parent companies can then collect long-term revenue from the projects.

In fact, the creation of the yieldco is a major reason why First Solar's Q1 earnings were so awful. Both First Solar and SunPower funneled existing projects into the yieldco so it would have the assets needed to launch. The redirected projects were left out of earnings, creating the appearance of big losses. (The same thing happened with SunPower's Q1 earnings.)

So while First Solar has some challenges ahead, it's being pro-active about facing them. Sanganeria's vision is a worst-case scenario that doesn't seem terribly likely. FSLR stock in the low $50s is in fact a great place to buy.

And if you're still not sure, consider this. One week ago a member of First Solar's Board of Directors, Michael T. Sweeney, bought 4,000 shares of FSLR stock at $55.30 per share. That raised his total stake to 18,239 shares.

It's an investing maxim that insiders may sell company stock for many reasons, but buy it for only one: They believe they'll make money.

The Bottom Line: FSLR stock has been slammed over the past month on a missed earnings report and a tough downgrade from RBC Capital. But when you dig deeper, it's clear that First Solar has a solid strategy for dealing with shifts in the solar industry. FSLR stock today is no disaster - it's a buying opportunity.

Follow me on Twitter @DavidGZeiler.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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