Smart Investing

 

June 22, 2012

September 27, 2013


Finding fire-sale stocks

I love finding companies whose stocks, at one time, were big hits and became overpriced, but 12 or 24 months later, the stock is in the toilet yet the company is doing well.

One company I’ve been thinking about is First Solar, which trades under the symbol FSLR. This company’s stock has been crushed, dropping 90 percent from its high of $170.80 on Feb. 17, 2011.

Based on a drop like that, one would think the company had tons of debt and no potential to ever make a dime again, or even that the use of solar power had become obsolete. First Solar is a company that designs, manufactures and sells solar modules in the United States and around the globe. Its job is to convert solar energy into electricity, which I think is still a viable market. The company is based in Tempe, Ariz., and at last count employed 7,000 people.

I was amazed to see that the company trades at 0.41 for the tangible book value, when the industry trades at 3.8. This simply means that the real assets of this company, such as the cash, A/R, and plant and equipment are being priced at 41 cents on the dollar, which sounds like a fire sale to me.

The company is making sales that were just under $500 million last quarter, and its sales are trading for 0.48 when investors are paying 1.5 for the industry average.

The earnings per share have dropped dramatically, falling 200 percent year over year. When I looked at the income statement, I noticed that cost of sales rose by 36 percent, but sales were down 12 percent for the same period.

I also noticed a restructuring charge totaling $460 million from the first quarter of this year and the fourth quarter of last year. This has caused the company’s diluted earnings per share to be a negative $7.03, hence no PE for the trailing 12 months.

If you plan to invest in this company, you must understand why the cost of sales is going up and the reason behind the restructuring charge. You then must determine if this will continue being a problem going forward.

First Solar has a good balance sheet with nearly $700 million in cash and short-term investments. The company has seen an increase in its total debt, now at $864 million, most of which is long-term debt locked in at lower rates. The debt to equity is 27 percent, still under the industry average of 29 percent. With all the cash on the balance sheet, the current ratio looks good at 2.5, just slightly better than the industry average of 2.4.

I know this company just signed a good contract in Los Angeles recently, but it does have some problems.

I turned to the analyst estimates and discovered that 36 analysts are looking for a mean estimate in earnings per share of $3.93 for the year ending December 2013. The range of these estimates is extremely large, with the low estimate at 99 cents and the high at $5.90. Over the last four quarters, the company has missed the estimated earnings every time.

I would think this would temper the forward estimates somewhat. As a matter of fact, over the last 90 days the December 2013 EPS has come down from $4.29 to the current $3.93, which is roughly an 8 percent drop. If First Solar misses the December 2013 EPS of $3.93 by 50 percent, it would still make $1.97, and if you place an earnings multiple of 10 on that $1.97, you get a stock price of nearly $20 per share. Investing in the stock at $15 would give investors a 33 percent return.

The company has an extremely low forward PE of 3.8 and also has a PEG ratio (price earnings divided by growth).

I believe that solar energy is here to stay, and it looks like First Solar has a lot of staying power.

The question is, after you’ve done your research, will you be able to see the light and stay with this company for the next 18 months and hopefully benefit from the rewards of this company?

Don’t forget to do your ongoing research on the company; buy and hold blindly doesn’t work.

Have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com.









Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


 

June 22, 2012

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