Photo:kqedquest, Creative Commons, Flickr
Have you been itching to buy FirstSolar (FSLR – Last trade $112.05), but nervous to get on board with the stock going hyperbolic? If yes, I have some great news. Barrons just did a front page story on how FSLR "may get singed". Given the stock's unbelievable run over recent weeks, investors are likely to bag some profits ahead of the Q2 earnings release on July 30. As suggested before, if we had to see a FSLR pullback it would be a buy signal. 
History tends to repeat itself. FSLR shares saw some weakness ahead of their Q1 earnings back in March, and the stock rebounded sharply after the better-than-expected results and improved guidance. The stock is likely to see some weakness heading into Q2 earnings, and strong earnings could once again see the stock move higher.
Two reasons why FSLR could have better than expected Q2 earnings, and why you should use any pullback to buy FSLR:
- In view of the company’s robust traction in capacity ramp, there is a strong possibility of upside surprises (this was highlighted in a Lazard Capital research note published on July 10).
- The company could beat estimates due to a declining tax rate. FSLR announced at the start of the year that it will expand production with a new four-line solar module manufacturing plant with an expected minimum annual capacity of 100MW. The Malaysian government is providing a 15-year income tax holiday as an incentive for FSLR's $150M+ investment in Malaysia. FSLR is moving a large portion of their production to this facility, lowering their overall tax liability. According to Bank of America estimates, FSLR will have a FY08 tax rate at 29% vs. 41% in FY07 due to this shift in production to Malaysia.
So why is Barrons negative on FSLR?
For starters, Barrons feels that FSLR is highly dependent on European government subsidies, especially in Germany. Barrons feels that recent developments in Germany are negative for FSLR. As we pointed out before, subsidy cuts should have been expected, and it could have been worse, so I'm not convinced of this negative. Solar is likely to see massive growth in the U.S. on the back of the new energy bill being passed. I believe that the good news from a growing market in the U.S. is good enough to outweigh the negative news from the mature German market.
The Barrons article also suggests that FSLR is incorrectly perceived as being a thin-solar technology. Thin-solar relies on chemicals and vapor deposition to lay down thin layers of film over a broad surface area. Because it's so light and flexible, it can be incorporated into building materials such as roof tiles, which turn roofs into big solar panels. Industry players call this "Solar 2.0," and the consensus is that this is the future of solar.
In FSLR's process, the film is still applied to heavy glass that resembles earlier generation panels. Consequently, a vast majority of their products are panels mounted on the ground because they are too heavy for rooftops, which suggest that it's not a true thin-film technology. The implication is that FSLR will miss out on the "Solar 2.0" boom.
Give me a break! I agree that, from a technical perspective, FSLR should see a pullback, but I can't imagine using fundamentals to justify such a move. The fundamental positives of FSLR's pricing power, sales visibility, lower tax rate and capacity expansion, far outweigh the negative of "not being a true thin-film technology." Of course Solar 2.0 is the wave of the future, but we are too far away from it to assume that FSLR won't exploit such an opportunity.
More investors read Barrons than this blog, so we could see some selling because of the article. Use any pullback as an opportunity to buy the stock, and get ready for blowout earnings on July 30.
Disclaimer: I do not own FSLR. I do not own a solar panel.
Photo by DavidglJay via Flickr and Creative Commons