First Solar (Nasdaq:FSLR) Continues to Impress - But is the Stock Overvalued at this Point?

Aug 01, 2008
Author: SCP Editor

August 1, 2008 – First Solar (Nasdaq:FSLR) had another stellar earnings report this week, with sales up 247% to $267 million from $77.2 million, and earnings per share of $0.87 on income of $69.6 million. Consensus estimates were for a profit of $0.58 per share on sales of $216.9. On its conference call, it raised its FY revenue estimate to a range of $1.175 billion to $1.225 billion. Analysts have mixed views:

On July 31 – First Solar price target raised at Lazard Capital by Sanjay Shrestha from $350 to $400 and 2008 EPS raised from $3.00 to $3.95.  First Solar price target raised at Calyon Securities by George Kotzias from $345 to $370 and 2008 EPS was raised from $2.95 to $3.78. Friedman Billings Ramsey analyst Mehdi Hosseini maintains a price target of $210 with a 2008 EPS target of $3.78.

So who is right? Well, looking at the company’s stock this morning we would be quick to point out it is managing to maintain an expensive valuation, at 28x P/S (ttm) and 101x P/E. To be sure, it won’t be able to maintain these extreme multiples forever but the question is when will they come back down to earth? There is so much to be positive about the company, which basically owns the thin-film solar segment which is expected to continue to demonstrate strong growth for the next decade – hence the pricey valuation, but here is out analysis:

At a 20x 2008 P/S multiple, our target market cap would be $24 billion, which would produce, roughly, a $299  stock price, assuming no further dilution, and at a 15x 2008 P/S, our target market cap would be $18 billion, which would produce, roughly, a $224stock price (again, assuming no further dilution).

At a 60x 2008 P/E multiple, where we are assuming 30% net margins, an uptick of 3% over the most recent quarter, but in line with FY 2007 margins, our target market cap would be $20 billion, which would produce, roughly, a $251 stock price, assuming no further dilution. And at a 40x 2008 P/E multiple, our target market cap would be $13.4 billion, which would produce roughly a $167 stock price.

Clearly, Lazard and Calyon think that a higher multiple is warranted, but we just can’t stomach those kind of premiums. Frankly, we think multiples of 10x P/S and 40x P/E leave little room for misses. Again, First Solar is clearly a special company and is being well supported by the Street. We will continue to watch it in amazement. But surveying the landscape of midstream solar companies, we think there are much better, and less risk companies out there which have similar growth prospects ahead.  

Disclosure Note: SCPEditor has no position in FSLR.


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