Beleaguered solar panel maker First Solar (FSLR) reported stronger than expected second quarter earnings Wednesday after the market close. On a GAAP-basis, the firm increased earnings 81% to $1.27, but net of “one-time” charges, the firm earned $1.65 per share, $0.75 north of expectations. Revenue also grew 80% year-over-year to $957.3 million, about $140 million higher than expected. The firm also increased its full-year earnings guidance to $4.20-$4.70 per share, from its previous range of $4.00-$4.20 and increased its revenue guidance to $3.6-$3.9 billion from $3.5-$3.8 billion.
However, we’re afraid the turnaround isn’t nearly as simple as it seems. The revenue increases were attributable to recognition of projects already under construction rather than an increase in the backlog. Still, the firm announced a new 139 megawatt project named Campo Verde Solar Project in southern California, and it will begin in the third quarter. Further, gross margins fell to 25.5% in the second quarter of 2012 from 36.5% in the second quarter of 2011, suggesting pricing remains somewhat weak. Profitability was helped by lower SG&A (overhead) and reduced start-up production costs. On the positive side, the firm’s balance sheet appears strong enough to weather further weakness—for now.
We also found it a bit troubling that the firm suggested it will reach return on invested capital of 13%-17% by 2016 (positive economic profit). This is a clear indication that tough times lay ahead in the next few years, in our view. The solar business is still quite challenged in spite of recent anti-dumping tariffs placed on Chinese solar imports into the US, as most global demand comes from governments which are mostly deleveraging and embarking on austerity measures. Although we think shares are slightly undervalued at current levels, we aren’t interested in First Solar, or the industry for that matter. We think several industries offer better risk/return profiles.