Axiom Capital Research On First Solar: "Material Donwside Ahead"

October 2, 2014 11:35 AM | 2 min read | Make a Comment
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Despite missing its second quarter Consensus estimates on August 5, shares of
First Solar
FSLR
proceeded to rally more than 15 percent to peak at $72.78.
Gordon L. Johnson II of Axiom Capital Research released a note on Thursday answering how such a rally is possible. First Solar has been “executing on what we believe was an unquenchable thirst for yield at the time,” Johnson wrote. “First Solar, after previously downplaying the prospect of it delving into the world of YieldCos, stated that it was now assessing the prospect of launching a YieldCo, with a decision to come no later than the next earnings call (i.e., October 31)” Johnson admits that that is difficult to determine if First Solar could launch a YieldCo. The analyst cautions that the company “could admittedly paint a picture to prospective YieldCo investors of unlimited potential backlog without actually having to show the projects on balance sheets.” The analyst currently holds the opinion that First Solar is not in a position to announce its intentions for a YieldCo given his analysis that the company does not have enough projects to launch a YieldCo until the end of 2015 and that preparing the necessary documents such as an S1 would takes a number of months to complete. The analyst explains: “If it were as easy as any entity with a large amount of capital throwing a couple of solar projects together to create a YieldCo, and then promising potential investors cold, hard, cash to invest in their YieldCo given they cannot show the pipeline necessary for future growth, any company with a large amount of cash would be in the YieldCo business (GE, Goldman Sachs, JP Morgan, Deutsche Bank, Intel, Facebook, Tesla, etc.). The problem, we believe, rests with the idea that this strategy would implicitly suggest the YieldCo parent is willing to dump cash into a risky/unknown investment vehicle, with no clear path to the growth necessary to attract investors. Again, while this would be great for the YieldCo, we feel this would be a detrimental path to take for the YieldCo parent.” If First Solar does announce a YieldCo, “this would show the emperor has no clothes" according to Johnson who concludes by stating that investors are already including a YieldCo announcement in the current price of shares. Bottom line, according to Johnson, now is an “opportune time” to initiate a short position in First Solar.
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