First Solar (FSLR) is off almost $100 from its early summer high of $317, which equates to an almost 1/3 plunge. This fall happened on the heels of a very strong Q2 earnings announcement as well. AmTech defends its BUY rating and even stands by its vertiginous $450 target. For now.
First, AmTech’s John Hardy tries to bring together all the reasons why the drop occurred:
- The lack of an identifiable near-term catalyst prior to 3Q08 earnings season, leaving short-term traders on the sidelines.
- Concerns over First Solar’s future margin profile as US utility business becomes a greater percentage of revenue. We believe this is the primary fundamental concern for FSLR.
- Precipitous decline in commodity prices associated with electricity generation such as coal, natural gas, and oil. Since the collective highs of early July, oil, natural gas, and coal have retracted 24%, 46%, and 32% respectively. YTD FSLR correlation with oil, coal and natural gas stand at 0.75, 0.66, and 0.49 respectively.
- Currency related concerns given backlog exposure to EUR denominated sales, though we believe FSLR is well hedged for the 2H08.
- General market weakness. Despite the secular growth aspects of the FSLR story and dramatic volatility YTD, shares are down relatively in-line with broader indices at 11% (DJII -14%, COMP -13%, SPX -14%).
The concern with the most important long-term implications is FSLR’s expected lower margins as the US utility business takes off.
On the positive side:
Hardy is quite confident FSLR is ready to dominate the US market if and when it takes off because FSLR’s US business is driven by:
- state RPS (Renewable Portfolio Standard) requirements,
- the increased cost of traditional fossil fuel generation due to commodity volatility and the increased cost of capital for traditional generation associated with potential carbon cap-and-trade legislation,
- company specific cost reduction efforts.
Hardy also runs through several margin scenarios. In general, he expects FSLR to maintain a 50%+ gross margin on US utility business assuming $5.00/watt installed and the extension of the federal ITC (Investment Tax Credit) . At this cost, with the current 30% Investment Tax Credit, Hardy thinks FSLR can likely provide electricity at $0.08 kWh and maintain favourable margin characteristics.
Margins will certainly compress if the Investment Tax Credit is not extended. And the legislation has been stalled eight times by congressional Republicans.
AmTech reiterates BUY on First Solar (FSLR), target $450. AmTech views the pull-back as an “excellent long-term entry point”.
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