On September 22nd, our story Cloudy Days for the Solar Industry and First Solar concluded that:
“Despite all the recent bad news plaguing the industry, the IBES consensus analyst long-term growth (LTG) rate is still 20.3%. Given the declining industry fundamentals and deteriorating earnings quality, that growth rate estimate may prove to be overly optimistic.”
This proved to be quite prescient—on October 25th First Solar (FSLR) slashed its earnings projections, announced spending cuts and ousted its CEO. Its stock, already cut in half this year, shed another 25% of its market value. It’s been a painful year for shareholders.
Given this outcome, let’s take another look at what prompted our initial story. We observed a large increase in inventory and accounts receivable levels, both important accrual accounts. We also noted the large negative cash flow from operating activities reported in the most recent quarter. Both these things drove the StarMine Earnings Quality (EQ) score into the bottom 9% relative to all stocks in North America. This model ranks stocks highly when a company’s earnings are supported by sustainable sources, such as cash flows and penalizes those whose earnings are disproportionately supported by unattainable sources such as accruals.
The low EQ score prompted our conclusion that FSLR may have difficulty sustaining earnings into the future. In this case, the model provided investors with a valuable warning signal.
So, what are our models currently showing about this stock? Is it time to jump in, as bargain seekers appeared to do early in the trading session on October 26th? What about the old adage advising against trying to catch a falling knife? According to the StarMine models, FSLR is looking like a falling knife.
Although appearing inexpensive by traditional measures, when we turn to sentiment signals such as analyst revisions (StarMine ARM) and market sentiment (StarMine Price Momentum), we find FSLR ranked in the bottom 10% of North American companies.
FSLR –StarMine Analyst Revisions Model (10/27/11)
FSLR –StarMine Price Momentum Model (10/27/11)
Since these models add value when timing purchase entry points, their low scores suggest holding off.
In addition to the negative momentum indicators, the company’s score on the StarMine Short Interest Model is in the 2nd percentile, driven by 24% of shares outstanding sold short. Our research suggests that it’s dangerous to bet against short sellers. And, like our earlier story, its earnings quality model score remains in the bottom decile. These systematic evaluation measures summarize a variety of stock characteristics. Here, these seem to be most in agreement, with scores that should be interpreted as cautionary.
Learn more about how StarMine analytics can help you pinpoint critical developments in your portfolio or watch list. Request a free trial today.
