The Opportunity In Utility-Scale Projects Despite Ongoing Risks

For over three months, First Solar (FSLR) has benefited from a lack of bad news. When FLSR announced on August 30th that it would halt deliveries of solar panels to its massive Agua Caliente project, the stock tanked 18.7% in one day, ending a sharp rally ignited by earnings on August 1st. Construction at Agua Caliente was way ahead of schedule and the palpable concern at the time was that FSLR had pulled forward a lot of panel demand from future years into 2012 to meet near-term revenue and earnings targets.When I wrote three weeks later that FSLR's rally was losing momentum, I figured that the stock would soon experience follow-through to that selling. It took another two weeks for the stock to trade back down to levels from August 30th, but the stock has yet to look back since.
Since the post-earnings break out in early August, the 50-day moving average (DMA) has held as solid support for China Solar chargers for Iphone Suppliers. For example, a post-earnings decline on November 2nd ended promptly at the 50DMA (an 8.9% loss on the day). FSLR's rally continued from there.The chart above shows that the 50-day moving average (DMA) has served FSLR well as support since the summer. When the stock broke above the 200DMA in mid-October, it was the first time FSLR had traded above that critical resistance since early 2011 when the stock was trading around $140. Although the stock is now barely trading at $30, it is breaking out in what has become a strong counter-trend rally.
First Solar bears finally started backing off First Solar in mid-August, likely contributing somewhat to the stock's steady push higher. However, the last time shares short dipped significantly in FSLR was in mid-February - that was the end of a short but strong rally that began at near four year lows in December 2011. Short interest in FSLR remains an incredibly lofty 51.5% of the float - a powder-keg waiting to explode one way or China Solar radio and charger Suppliers.In FSLR's 3Q12 10-Q, we find further evidence of system pricing trending <$2.00/W that suggests margins and EPS are headed lower. With $5.3b in revenue expected from its 1.4 GW-AC pipeline balance, we estimate 50% of the project MWs were sold <$2.00/W. With higher ASP projects likely to fall from ~50% of shipments in 2012 to 36% in 2013 and 21% in 2014, we expect gross margins to come under pressure and for FSLR to guide to a decline in EPS Y/Y in 2013. We lower our estimates accordingly and maintain our Sell.During the last earnings conference call, FSLR answered a pipeline-related question by stating that the company has recognized revenue on 626MW of its 3GW pipeline. I found it telling that no analyst directly asked about Agua Caliente. Instead, analysts were trying to get a handle on things like FSLR's international mix of business, competition, margins, and the bankability of the backlog.