Analysts React To First Solar (FSLR) Guidance: Most Cautious, But Hold Ratings

The has a great run down of analyst reactions to First Solar’s (FSLR) guidance last night.  The company guided higher and announced significant expansion plans over the next two years.  The following is reprinted with permission.

Piper Jaffray: “While strong 2010 top-line guidance and newly announced capacity expansion are positives, a substantially higher mix of lower margin systems business is expected to prevent both margin and EPS expansion in 2010. FSLR remains the most profitable solar OEM with the best cash flow and balance sheet. Though 2010 guidance is likely conservative, FSLR revenue growth will not beat leading Chinese OEMs (our favorite solar stocks). We view 2010 as a transition year while the company remains strongly positioned for growth in 2011, maintaining leading profitability and cash flow.” Reiterates Overweight rating and lowers price target from $164 to $156.

Pacific Crest: “Capital expenditure guidance of $500 million to $550 million fell short of our $700 million estimate, but should be just enough to keep long-only investors from selling the stock. The company announced eight new manufacturing lines, which will cost roughly $365 million and should come on line in the first half of 2011. Guidance fell short of our expectation for 16 new manufacturing lines; once again, management demonstrated its conservative approach for managing future capacity versus a tumultuous market environment.” Maintains Sector Perform rating.

Deutsche Bank: “First Solar guided 2010 revenue above expectations, EPS in-line with consensus expectations, and gross margin below our expectation as the company’s EPC (systems) business ramps with mid-single digit gross margin, and module ASPs may prove stronger in 2010 than our expectation. While the EPC business is not intended to be a profit center it will induce gross margin volatility bringing corporate gross margin to a low-30% range in 2H10.” Maintains Hold rating, adjusted price target to $135.

FBR Capital: “Although FSLR’s analyst event was subtle in tone, on expectations and competitiveness, we think its proactive responses to the “new normal” are commendable. Positives: (1) revenue guidance of $2.7B-$2.9B (versus Street’s estimate of $2.4B); (2) FCF of 7%-10%; (3) a cautious capacity-expansion plan. Negatives: (1) a return on net asset (RONA) target reduction, from 20% to 16%-18%; (2) increased mix of EPC+project lowers the gross margin (versus the last three years); (3)an increased risk of delay/cancellations of the project by regulators/voters.” Reiterate Underperform rating.

Canaccord Adams: “While we continue to believe that First Solar is a long-term leader in the PV (photovoltaic) space, it is expanding its business at the expense of margins in a somewhat uncertain demand environment. As such, the risk reward leads us to believe that the shares could experience multiple contraction.” Maintains Hold rating but lifts price target from $115 to $130.

Collins Stewart: “The upside is due to FSLR anticipating $600-800M of sales from its EPC (engineering, procurement, construction) division. That reflects the additional revenue from developing and building solar projects, but does NOT include the module sale for those projects, which are accounted for separately. That EPC revenue is well above the $340MW we were expecting, as it appears FSLR plans to install perhaps 300-400MW in CY10, well above our 215MW forecast. According to FSLR’s guidance, its EPC operation will generate only a 5-6% gross margin and a 0% operating margin. That being the case, while we are raising our CY10 revenue forecast to $2.76B, that additional revenue has no impact on EPS.” Reiterates Buy rating and $160 price target.

Wedbush Morgan: “We are cautious on First Solar shares due to expected margin contraction, pricing pressure, project development risks, and potential feed-in-tariff changes in 2010. Although we believe the company will likely remain the industry cost leader in the near term, increased competition and declining ASPs are expected to pressure margins.” Maintains Neutral rating, price target raised from $120 to $125.

Kaufman Bros: “MORE PROJECTS – LESS PROFIT” Maintains Sell, $85 price target.

Janney Montgomery Scott: “BUY-rated First Solar issued guidance for 2010 that was ahead of our revenue estimates on increased shipments, and below our earnings estimates on lower-than-expected margin guidance. Despite the slimmer margin guidance due to the Company’s “prudent” view of pricing and a faster than expected move into the 5-6% gross margin EPC business, we believe that FSLR represents a compelling value at this level. Some will likely question the Company s accelerated move into the Engineering, Procurement and Construction (EPC) business, but we believe it is wise at this point to focus on driving throughput and seeding the market.”

Note: Raymond James weighed in by downgraded First Solar (FSLR) to Outperform.. no notes for them.

Shares of FSLR are down about 1% today.

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