First Solar (FSLR): 2019 Top Picks' Mid-Year Update

07/18/2019 5:00 am EST

Focus: ENERGY

David Coleman

Quantitative Portfolio Strategist, Argus Research

David Coleman, an analyst for Argus Research, selected First Solar (FSLR) as his top investment idea for 2019. The stock has since risen 55%. Here's his latest update on this green energy idea.

We are maintaining our buy rating on First Solar Inc. (FSLR), a leading solar energy company; we view the firm as well positioned in the solar industry based on its positive cash flow and solid balance sheet. The stock rose 48% in the first half of 2019.

We also like the company's focus on cadmium telluride technology, which should provide a cost advantage relative to more commoditized technologies like polysilicon.

In particular, FSLR's technological investments have enabled the company to lower the cost of solar generation on a per-watt basis and to improve its conversion efficiency. They have also helped the company to expand its opportunity set of utility-scale projects.

On May 2, the company reported 1Q19 net sales of $532 million, down from $567 million in 1Q19, reflecting lower systems project revenue in the U.S. and Japan. The company reported a 1Q GAAP loss of $0.64 per share, compared to earnings of $0.78 per share in 1Q18. We had expected a loss of $0.05 per share. For all of 2018, EPS came to $1.36, compared to a loss of $1.60 per share in 2017.

Along with the 1Q results, management provided updated full-year 2019 guidance. Management projects net sales of $3.5-$3.7 billion, up from its previous guidance of $3.25-$3.45 billion.

The company expects earnings to be back-end-loaded this year, with a loss in 1Q and lower earnings in 2Q due to plant start-up costs. We are lowering our 2019 EPS estimate to $2.71 from $2.99 and maintaining our 2020 estimate of $3.31.

On valuation, FSLR trades at 22.1-times our 2019 EPS forecast, in the middle of the historical average range of 4.5-37.7 and below the peer average of 26.3. Investors should expect FSLR's financial results to be uneven on a quarter-to-quarter and year-to-year basis due to the timing of revenue recognition.

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