Will First Solar (FSLR) Miss Estimates This Earnings Season?

First Solar, Inc. (FSLR) is set to report its third-quarter 2014 earnings results after the closing bell on Nov 6, 2014. Last quarter, it had delivered a negative earnings surprise of 87.88%. Let us see how things are shaping up for this announcement.

Earnings Whispers?

Our proven model does not conclusively show that First Solar is likely to beat on earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: First Solar has an ESP of +7.81%. This is because the Most Accurate estimate stands at 69 cents while the Zacks Consensus Estimate is 64 cents per share, resulting in a difference of +7.81%.

Zacks Rank: First Solar carries a Zacks Rank #4 (Sell). Though First Solar’s positive earnings ESP increases the predictive power, we caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into an earnings announcement.

Factors Affecting This Quarter

Tempe, AZ-based First Solar is steadily expanding its global footprint. The company primarily caters to the North American market but is keen to grab a larger market share. Like its peers, Canadian Solar Inc. (CSIQ), SolarCity Corp. (SCTY) and SunPower Corp. (SPWR), it also intends to expand its operations in the Middle East, India, Japan, Australia and South America to boost its revenue and improve margins.

In Jul 2014, the company inked a deal to supply 100 megawatts (MW) of modules annually to XSOL Co. This strategic alliance with XSOL, which has a track record of promoting solar products in Japan on behalf of its foreign partners, will enable the company to gain significant traction in an increasingly competitive market. After the 2011 Fukushima nuclear disaster and particularly after the declaration of the feed-in tariff program in Jul 2012, Japan’s solar market has been witnessing a boom. The program emphasizes on promoting clean energy. The company’s efforts to tap the growing Japanese market for solar energy will render it a competitive edge and boost its revenue. Moreover, in Aug 2014, First Solar signed a 20-year contract to build 45 MW of photovoltaic (PV.V) projects in India’s Telangana state.

In the third quarter, the company achieved a significant milestone by building a thin-film PV cell with a conversion efficiency of 21%. In contrast, an average production panel converts only 17% of sunlight into electricity. The company is evidently advancing in the field of research and development (R&D). In the second quarter of 2014, the company’s R&D expenses had increased 5.5% on a year-over-year basis. The increased efficiency of solar modules and focus on technological innovations will result in a growing order book for the company.

Despite rising orders and technological innovations, we remain skeptical as to whether the company will beat estimates this season. Last quarter, the company had reported a fall of 89.2% in its earnings on a year-over-year basis primarily due to project delays. Thus, we are yet to see the present order flow and projects translating into higher earnings for the company.

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