First Solar (NASDAQ: FSLR) a Buy Here?

Alternative energy technology just seems to make sense. But investing in the future this way still seems to have as much risk as biotech. Case in point is First Solar (NASDAQ: FSLR), the biggest company by market capitalization in the solar space, whose stock has been slowly beaten down — nearly to its March 2009 lows of $100 – after a moon-shot to $207 in May.

In November, I was a buyer of the stock and the call options, looking for a rebound to fill the vicious gap down from $150 to $130 on its disappointing third-quarter report. FSLR made it from $120 to $140 by mid-December, but it double-topped there in January and commenced a steep slide down to $107.

The price action of February alone is even more disturbing as it climbed back to $127 on low volume and then got smacked down again to $110 on heavy volume. The one-year chart below tells the story, with the 50-day moving average a clear lid on the last rally and the 200-day all the way up at $144.

Why Do They Hate Solar?

One of the big backdrops for solar stocks in the past few months has been concern that Germany, a country that has traditionally provided large government subsidies for solar investment, may roll back some of the gravy train soon. Even though the official word that came on Monday was less bleak—with cuts of only 15 percent of funding for “solar parks” versus expectations of as much as 25%—the sector as measured by the Claymore/MAC Global Solar Energy Index ETF (NYSE: TAN) is clearly not dancing in the sun on the news.

Below is a chart of TAN, also subdued by its 50- and 200-day moving averages, and barely a threat to its 52-week high of $11.67 achieved last June. FSLR is the top holding of TAN, which also includes Suntech Power Holdings (STP), Chinese company Trina Solar (TSL), and MEMC Electronic Materials (WFR).

The Nuclear Option

Another blow to sun power worshippers came after President Obama’s State of the Union Address when he kept a promise and earmarked $8 billion in loan guarantees for nuclear power as his new favorite source of clean energy. And in First Solar’s home state, Arizona Republicans are delighted to be redefining “renewable” to include nuclear power and thus include it under the umbrella of the Renewable Energy Standard (RES).

The Arizona RES requires utilities to generate 15% of their electricity from renewable sources by 2025. The muscling in of nuclear into the “clean and renewable” space will likely be bad for solar companies as they will attract less capital by default, further pushing out the dreams of environmentalists and alternative energy investors.

What’s Wrong With FSLR?

First Solar manufactures solar modules with an advanced thin film semiconductor process that significantly lowers solar electricity costs. On February 18^th, FSLR reported earnings per share of $1.65, which actually beat the consensus by 16 cents, and still gives the company stock a very attractive 15 P/E trailing multiple. But the earnings conference call that followed possibly held more negatives on balance for investors than they were hoping for. Here are some excerpts from comments by Rob Gillette, CEO of FSLR:

Our forecast from ‘09 to ‘12 is a 35% CAGR, so we expect the German market to decline over time as the FiT (feed-in-tariff) changes will start to make the market itself less financially attractive and the economics there in terms of sunlight and other things making it less sustainable over time.

The transitioned markets we’re focused on are U.S., China, France and Italy, will continue to grow and probably overtake Germany as a market. The economics I think will provide long-term growth for our business, especially, as electricity prices start to grow.

Comparing those two markets, subsidized and transition market economics, the subsidies really are designed to create markets and they have. We can see that in Europe and especially, in Germany, and growing now in Italy and France. The FiT decline over time to fossil fuel competitive levels may result in declining economics, as we said.

So the first half is very strong demand, orders look very strong. The second half, we’ll have to see. We believe Italy will start to accelerate in growth with a lot of development that has taken place. And we believe that some of the challenges that may exist in Germany, we’ve more than offset by a lot of the pipeline that we mentioned during the presentation. So we feel really good about the outlook for growth and demand.

Here Come the Downgrades

Courtesy of Thomson-Reuters news services…

February 19^th: Merriman downgrades to Neutral from Buy and ThinkEquity downgrades to Hold from Buy.

February 23^rd: Wunderlich initiates with a Sell rating and price target of $90, saying they believe 2010 revenue and EPS estimates are at risk of downward revisions, particularly in the second half. These estimates are predicated on a 40% increase in worldwide photovoltaic (PV) demand and relatively stable module prices. They believe PV demand will fall short of forecast and module prices will fall 10%-20%. Firm expects FSLR’s response to a less expansive market will be to cut prices as it attempts to keep its factories running at 100% capacity, thus causing a decline in gross margins. They believe the stock’s premium valuation will continue to erode.

February 23^rd: Wedbush Morgan downgrades to Underperform from Neutral and lowers their target to $90 from $110 due to expected margin contraction, pricing pressure, project development risks, and potential feed-in-tariff changes in 2010.

Here Come the Opportunities

All in all, it sounds bad, but it doesn’t sound like awful news for FSLR. If they can capitalize on the “transition” markets they speak of in China, Italy, and France, they should be able to turn things around later this year. Until then, the stock has some hard rows to hoe and if earnings drop significantly, it may get “re-priced” below $100. The comments above from Wunderlich on over-optimistic growth targets getting revised downward are the real linchpins for this company and its stock this year.

My bet is that this is a name you want to own for the future. So I am thinking long-term when I see the possibility of buying it at $100 or slightly lower. The alternatives to FSLR are buying Trina Solar (NYSE: TSL) below $25 and a 20 P/E multiple, or taking almost no risk in the space and just buying the TAN ETF. Any way you slice it, buying the future of alternative energy should deliver reward commensurate with risk.