Forecast for First Solar: Mostly Cloudy With a Good Chance of Storms

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The first half of the year was bright for First Solar (NASDAQ: FSLR), a maker of photovoltaic solar power systems.

Shares soared some 50%. After reporting a 70% drop in second quarter profit and slashing guidance for the remainder of the year, the best days of 2013 may be well behind  the company.The dismal quarter and gloomy outlook sent shares tumbling 9%, and more stormy days ahead are expected.

Second quarter earnings per share came in at $0.39, well short of the $0.50 that analysts were expecting and down 76% year-over-year. Even more disturbing was forward guidance. First Solar cuts its sales, income and earnings per share forecasts for the remainder of the year. Net sales are now expected at $3.6-$3.8 billion, down from $3.8-$4 billion. Operating income is expected to be $405-$435 million, down from $430-$460 million. Earnings per share are projected to come in at $3.75-$4.25, down from $4.00-$4.50.

It wasn’t all bad news, of course. The company is expecting slightly higher gross margins of 22-23% (up from 20-22%) due to lower operating expenses. First Solar’s cash stash also grew over the quarter to $1 billion, up from the $580 million pile it was sitting on in the prior quarter.

Inking a deal with GE

First Solar just announced that it is spending some of that cash. The company is buying General Electric’s (NYSE: GE) cadium telluride solar intellectual properly as part of an agreement aimed at advancing thin-film solar cells and modules. In return, GE gets 1.75 million shares (a 2% stake) of First Solar, which it has agreed to hold for at least three years.

GE scrapped its plans to manufacture its own solar panels due to a global market glut.

The current deal, also a strategic alliance, allows First Solar to use its manufacturing scale to start producing GE’s new cadium technology (expected to start next year), and GE will then buy First Solar panels. The deal also allows GE to concentrate primarily on its solar inverter, plant optimization and solar plant finance businesses. 

First Solar CEO Jim Hughes said that adding “GE’s PV thin film technology and R&D resources will advance out technology roadmap, while realizing cost reduction in our manufacturing process.” As part of the deal with First Solar, the two companies formed a research alliance around solar inverters, which help convert sunlight into grid-ready electricity.

The news is encouraging, but also troublesome in that GE recognizes the uncertainty that lies ahead for the sector.

An alternative to consider

For investors thinking of tiptoeing into solar stocks, China's Yingli Green Energy Holding (NYSE: YGE) is worth a look. The company recently said second quarter photovoltaic module shipment growth was “significantly better” than expected and raised the guidance range for its gross margin from 9-11% to 11-12%.

Industry watchdog and consumer advocacy group Silicon Valley Toxics Coalition (SVTC) recently released its annual Solar Scorecard, evaluating the commitment of leading photovoltaic companies to environmental protection, sustainability and social justice. Yingli, with top scores, was at the head of the class.

Additionally, a number of industry-wide events have shined a sunny spotlight on Yingli's future prospects. Among the company's recent achievements, it is now approved to conduct in-house Underwriters Laboratories (UL) certification testing for solar modules.

Earnings updates show marked and stable improvement for Yingli after a year that was very trying for the overall sector. China plans to boost its solar capacity five-fold by 2015; the added demand will not only help alleviate oversupply, but it will also handsomely benefit Yingli. This will in return reward the company's shareholders.

Uncertain demand and oversupply

Solar stocks have been volatile lately, following two solid years of turmoil in the sector. Uncertain supply and demand continues to weigh heavily on the industry. According to Lux Research, profit margins won’t recover until 2015 when solar oversupply plummets due to bankruptcies among uncompetitive players and underlying financial constraints prevent capacity expansion. Growth in new markets such as China will also eventually help. Careful investments in the industry may pay off once the recovery happens.

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