Investors were not kind to First Solar yesterday! The stock was down 10.85% ($6.12) to close at $50.29 after reporting slightly disappointing third quarter results on Thursday. But the drubbing they took in the market yesterday has more to do with what was said on the earnings call, than the financial results that were reported.
Lets Start with the Numbers for First Solar.
First Solar reported net sales of $889 million for the third quarter, which missed Wall Street expectation of $1.05 billion and was down 30% from the same quarter last year. The Company reported a third quarter GAAP earnings per fully diluted share of $0.87, compared to earnings of just $0.04 in the prior quarter but still a huge decrease from the $1.94 realized in the same quarter of 2013.
Cash and marketable securities at the end of the third quarter were approximately $1.1 billion, a decrease of approximately $234 million compared to the prior quarter. Cash flows used in operations were $47 million in the third quarter. The reduction in cash and marketable securities during the quarter was due to the construction of multiple utility scale power plants which have not yet been sold.
Despite all of this, First Solar maintained their full year 2014 earnings guidance of $2.40 to $2.80 and operating cash flow guidance of $300 to $500 million. Overall, while the numbers were disappointing, there was substantial improvement over the horrendous second quarter they experienced, and only a slight adjustment downward in total expected 2014 net sales.
The Rest of the Story
As much as it pains me as an accountant to say this, sometimes the numbers don’t tell the whole story. Obviously this is the case with First Solar, as their numbers by themselves shouldn’t have precipitated the response from investors that was seen. The real story was obvious if you were on the earnings call. Almost every question they received had to do with their yieldco decision.
A yieldco is a publicly traded company that is formed to own operating assets that produce a predictable cash flow. Separating volatile activities (e.g. R&D, construction) from stable and less volatile cash flows of operating assets can lower the cost of capital Yield cos are expected to pay a major portion of their earnings in dividends, which may be a valuable source of funding for parent companies which own a sizeable stake.
There has been a lot of Yieldco formations in the renewable energy sector in the last couple of years and First Solar has made the decision that they will not “spin off” a Yieldco at this time. The analysts on the earnings call doubled down on questions regarding this decision as the market has been led to believe that Yieldcos offer a much more attractive cost of capital for a project and will thus allow it to generate higher net earnings. First Solar stuck to their guns stating that so far their calculations see no advantage to establishing a Yieldco at this time stating that some of the cost of capital savings associated with them may be more hype that reality. Clearly, the market has bought into the hype and decided to punish First Solar for their viewpoint. We will have to wait and see which approach turns out to be more profitable.
Now for some good news. First Solar is expecting a robust growth in demand n 2015 and 2016 primarily due to renewable energy tax credit in the United States coming to an end in 2017. In response, the company is planning on restarting 4 idled assembly lines at the plant in Malaysia (and addition of 360MW of capacity) and will add 2 lines to their Ohio facility (and addition of 100MW of output). While this potential sales increase may be just a pull forward of demand in the U.S., they believe that other regions such as Latin America and India will step in to take up the slack post 2016.
Tracey is an accountant and entrepreneur with a passion for nature. This passion is what spurred her interest in renewable energy, and the rest is history as they say. Tracey is a principal in Energy Think Group, the publisher of Solar Thermal Magazine and Tek-Think. She is also the principal at Women’s Financial Help Desk. She spends her free time in the outdoors with her horses and dogs. She loves to travel.