A Cloudy Outlook for First Solar

It was once one of the brightest lights in alternative energy. But the future has dimmed for First Solar (symbol FSLR), the nation’s largest producer of photovoltaic equipment.

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The once-hot stock, which traded for as much as $317 a share in May 2008, fetched just $35 on January 6. Its descent accelerated in 2011 after the Tempe, Ariz., company ousted its CEO and started cutting earnings forecasts late in the year. It now sees a profit of $3.75 to $4.25 per share this year—roughly half of what it was expected to have made in 2011. The stock (which we recommended in our June 2009 issue at $142) now trades at just 9 times the midpoint of the forecasted-earnings range.

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Yet even at this seemingly bargain-basement price, few analysts are bullish. There are just too many uncertainties facing the industry and the company, says Citi Investment Research analyst Timothy Arcuri, who rates the stock a “hold.”

“Developing solar projects is very capital-intensive, and the payback is a little unclear,” he says.

Also weighing on the stock: expiring subsidies for clean energy. First Solar had been growing at a rapid clip, thanks largely to subsidies from various governments. Such support made it feasible for both industry and utilities to build massive solar farms, even though it costs much more to produce a kilowatt of energy from solar power than from fossil fuels. The subsidies were particularly generous in Germany, which accounted for roughly half of First Solar’s sales, but that program expired at the end of 2011. Similar programs in France, Italy and the U.S.—other major markets for First Solar’s energy farms—are expiring over the next five years. Meanwhile, cutthroat competition from providers in China is putting further pressure on profit margins.

The good news is that the subsidies financed research that has made solar more efficient and less costly. In the meantime, First Solar has been working diligently to reduce its costs to survive in a world without subsidies. But it’s not yet clear whether the cuts will be sufficient to stave off losses when the government payments are gone.