First Solar (FSLR – Last trade $111.64) on Thursday registered to sell 9.65 million shares, including 5.65 million shares to be sold by selling stockholders. FSLR traded down sharply on the news. We have suggested before that FSLR may go for a secondary offering, and today's sell-off on the news provides a great entry point ahead of Q2 earnings on July 30.
Back on June 20 we suggested that FSLR will see a pullback and that any pullback will be a great buying opportunity. This scenario has now materialized, and we stick with our call. The Barrons article published over the weekend led to some profit-taking, and today's secondary filing should have been anticipated, given the elevated stock price. Besides, rumors of a secondary have been doing the rounds for many weeks, and today's news should have been well priced in by now.
To recap:
– FSLR should have better than expected earnings on July 30: In view of the company’s robust traction in capacity ramp, there is a strong possibility of upside surprises. In addition, the company's declining tax rate also adds potential upside to earnings. This was discussed in detail in a previous note.
– FSLR has strong fundamentals: FSLR will have greater pricing power in the long term due to its lower cost per watt. Recent data showed that FSLR modules were the lowest-cost in commercial production during 4Q06 at $1.25/W to manufacture (approximately 50% below the industry average). Margin pressure, resulting from reduced barriers to entry into the solar market, is expected to lead to many casualties. If we had to see margins compress, FSLR would be best positioned to weather the storm due to its pricing power.
– FSLR is immune to the polysilicon shortage, as their manufacturing process doesn't need the material.
Disclaimer: I don't own FSLR. I would love to buy some shares right now, but I just moved into a new apartment and cash flow isn't looking too great ;-)