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First Solar (FSLR) Earnings Preview: Can This Solar Giant Beat Estimates?

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The solar power industry has been in focus as of late thanks to incredible share price appreciation. In fact, the two main solar ETFs—(TAN - Free Report) and —are both up more than 80% YTD, largely thanks to a late summer surge.

Yet now with prices at multi-year highs, investors are likely be expecting more from these companies at earnings season. This comes into focus later today with the profit results for First Solar (FSLR - Free Report) .

First Solar in Focus

FSLR is an Arizona-based company that specializes in the design, manufacturing and sale of solar modules that turn sunlight into electricity. Thanks to a recent price surge, the company now has a market cap of $5 billion, and it is trading near the high end of its very wide 52 week range.

Earnings for this quarter are looking quite mixed though, as the company has seen estimates move both lower and higher in the past week. However, the consensus estimate trend is definitely unfavorable, as the estimate has gone from $1.01/share 30 days ago to just 92 cents a share today.

And if that wasn’t enough, investors should also consider the company’s current reading on a Zacks Earnings ESP front. This metric compares the most accurate estimate to the broad consensus, and it is currently showing a -14% reading. In other words, if the more recent analyst updates are correct, FSLR may be in line for a miss.

This is obviously concerning, especially when taking into account FSLR’s recent history. The company has missed at earnings two quarters in a row, including a 22% miss in the previous quarter.  

Still, if you look at how the stock has done over the past six months, it is pretty clear that earnings misses haven’t exactly derailed the company’s prospects. Instead, margins, capacity utilization, and the efficiency level of the panels look to play a central role in FSLR’s outlook.  

Key Factors to Watch

As of the last 10-Q, FSLR expected to produce about 1.6-1.7 GW of solar modules in 2013, compared to a manufacturing capacity of 2.2 GW. So, an increase in production on this front would definitely suggest stronger demand for their product, while a lower number may signal that end users are going elsewhere for their solar needs.

Meanwhile, the average efficiency of their solar panels is also an issue. In the last report, this figure rose to 13.0% from 12.6% a year ago. Any improvement on this front will also be welcomed, especially considering that the company wrote in its own 10-q that it is a low cost manufacturer, but one that has ‘lower conversion efficiency of our modules compared to many types of crystalline silicon modules’. In other words, more gains here while remaining low cost will add to the bull case for FSLR.

And given their focus on being low cost, any guidance or changes in the margin picture may also be key to the company’s outlook. FSLR had gross margins of 27% for the most recent quarter, which is an improvement over last year’s 25.5%. It will be important for FSLR to keep this elevated, while still finding a way to improve the efficiency of their key product.

Bottom Line

The trend has obviously been great for the broad solar space, but now we will start to find out if the sector is living up to the recent hype. While the Zacks Industry Rank for Solar is quite high—top 20%-- there is a pretty wide range, including one top ranked stock (SPWR - Free Report) , and one #4 ranked security, .

Given this, there could definitely be some volatile trading over the next few days as a flurry of solar companies report. And beyond earnings, make sure to watch some of the key factors specific to solar—such as capacity utilization and solar module efficiency—to see if the bullish trend can continue in the space.

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