First Solar's trailing five-year valuation metrics suggest that the stock is undervalued as all three of the metrics are in the lower end of their respective five-year ranges. First Solar's current P/B ratio is 0.92 and it has traded in a range of 0.9 to 18.9 over the past five years. First Solar's current P/S ratio is 1.36 and it has traded in a range of 1.4 to 41.3 over the past five years. First Solar's current P/E ratio is 7.5 and it has traded in a range of 7.5 to 200.0 over the past five years. This probably is not the best valuation metric as it traded at ridiculous multiples in the past five years with the excitement over the stock. I think multiple compression will continue as orders from Europe and North America remain weak. In addition, Chinese competition will continue to eat away at First Solar's cost-advantages and market share.
Thus, the company's forward valuation metric may have limited value as a number of solar stocks are expected to lose money next year. However, First Solar is currently trading at about $44 a share with analysts expecting EPS of $4.18 next year, an earnings decrease of 28% year over year, for a forward P/E ratio of 10.4. Taking a look at the company's publicly traded comparisons will give us a better idea of the stock's relative valuation. One solar company that is not projected to lose money is SunPower (NASDAQ:SPWR), which is currently trading at about $7 a share with analysts expecting EPS of $0.32 next year, an earnings increase of 357% year over year, for a forward P/E ratio of 23. Based on this metric, First Solar is the best of what I think is a bad lot.
Analysts differ on their conclusions. The consensus price target for the analysts who follow First Solar is $43. That is downside of -1% from today's stock price of $43.45 and suggests that the stock is overvalued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.
However, analysts’ credibility is limited here. First Solar has beat EPS estimates two times in the past four quarters. The company's EPS figures have come in between -40 cents and 17 cents from consensus estimates or about -23.9% to 14.7% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin which suggests that the stock may experience upside from earnings surprises. I disagree with optimistic analyst sentiment.
The last metric suggests that the stock is a short. The company's fair value on a discounted cash flow basis is $30 a share versus its current stock price of $44. This suggests that the stock is overvalued.
Institutional investors will be the catalyst that pushes the stock price further downward. The top two funds that own First Solar are American Funds Growth Fund of Amer A, which owns 4.8 million shares or 5.52% of the shares outstanding, and American Funds NVIT Growth II, which owns 3.1 million shares or 3.56% of the shares outstanding. The top two institutions that own First Solar are Estate of John T. Walton, which owns 14.9 million shares or 17.26% of the shares outstanding, and JCL Holdings LLC, which owns 10.1 million shares or 11.74% of the shares outstanding.
Looking at the price action, the stock has been hammered on high volume, which suggests institutions are a part of its active market for shares. First Solar is down -72% over the past year, underperforming the S&P 500, which is up 3.7%. On a technical basis, the stock is currently above its 50-day moving average, which sits at $37.05 and below its 200 day moving average, which sits at $65.14. From here, the fundamental picture for First Solar remains weak. Until the market for solar products can rationalize itself without subsidies I consider this stock a sell. I would not sell short due to the potential for a price spike due to government subsidy-related news; however, puts could be an attractive option if volatility continues to abate. Short-dated puts might be the best bet for sophisticated investors looking to capture continued downside.