FSLR – First Solar Falling into the Blue!
April 12, 2012
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We tweeted yesterday, a warning to investors of First Solar (FSLR) that FSLR had fallen below EBV-3. This is significant because the market is communicating (Yes, the market is talking to you) there is something wrong with the balance sheet of FSLR or is it something more serious?
First, let’s look at the chart.
First Solar with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of FSLR subsequent to this post will be maintained on Facebook, here.
Here are 4 reasons why stocks may fall below EBV-3. Which we call “falling into the blue”.
- If the company is an operating business with a big amount of goodwill on the balance sheet. (Goodwill (excess purchase price over FMV of physical assets) is recorded usually after one or more acquisitions performed by the company). The market is telling the investor that the “good” goodwill on the company’s balance sheet has turned to “bad” goodwill. Usually this “bad’ goodwill will be written off in a subsequent quarter or year-end.
- If the company in question is a financial, the recorded assets are NOT worth what is stated on the balance sheet. Market value is worth less than book value. If the financial is big, say a money center bank, write offs usually do not occur.
- If the company has little or no goodwill, the market is saying the company’s whole is worth less than the sum of its’ parts. (This is rare). Also the company’s business model might be in peril. Don’t see this much in public companies unless it’s a “concept” company with only one line of business.
- The company maybe insolvent. Model Price ™ has a solvency ratio calculation that we use (see “Key Concepts” tab above). We identify 3 forms of insolvency. If the security has any form of insolvency, this warning sign (trading below EBV-3) will likely mean the equity price will go to zero unless the company can recapitalize in a timely fashion.
So let’s look at this list, point by point, to see if any of these points is applicable to FSLR.
- Reviewing the financial statements, FSLR took a Goodwill impairment charge during 2011 of $393 million dollars. The company stills has $65 million dollars in recorded Goodwill on the balance sheet. Even if the company reduced this amount to zero, it wouldn’t be material to the company, and not a reason for the company to fall into the “blue”.
- FSLR is not a financial so point 2 does not apply.
- Reviewing the 10K we found these comments
“The solar industry experienced a challenging environment in 2011. The year was categorized by intense pricing competition, bankruptcies of several solar companies, many solar companies with little or no operating income, and toward the end of the year, announcements of manufacturing shut-downs or slow-downs. At December 31, 2011, the global PV industry consisted of more than 150 manufacturers of solar modules and cells. In the aggregate, these manufactuers have installed production capacity that significantly exceeded global demand in 2011. As a result, industry average module pricing declined significantly as competitors reduced prices to sell-through inventories in Europe and elsewhere. We believe this structural imbalance between supply and demand (i.e., where production capacity significantly exceeds current global demand) may continue for the foreseeable future, and we expect it will continue to put pressure on pricing and our results of operations in 2012.”
Bingo, we think we found the reason for FSLR “falling into the blue”. The market has not only priced in this structural imbalance but also has determined this imbalance is getting worse.
- To complete our list above, FSLR has a Solvency Ratio of 1.96. This is healthy and in no danger of having solvency issues in the near future. (See “Key Concepts” tab above)
So what are we saying?
We believe the market must be making a comment on the business itself. The market is discounting “bad” news ahead for this company. We will watch with interest what the future holds however the market is talking, are shareholders listening? Also, once FSLR stock price falls below EBV-3, the company’s stock price will become more volatile. WHY? The company’s stock no longer has the structure of the EBV lines. EBV-3 is our last line.
What would change our minds?
If and perhaps when FSLR transits above EBV-3. A transit above EBV-3, you guessed it, would be “Coming out of the Blue”!