This may be the ultimate battleground stock

RBC Analyst: Why I slashed my target on First Solar
RBC Analyst: Why I slashed my target on First Solar   

Shares of volatile First Solar plunged 7 percent after a downgrade and price target cut from RBC. The extent of the downgrade, and Wall Street's outsized reaction, are the latest evidence of just what a battleground the solar energy company's shares have become.

RBC's Mahesh Sanganeria cut his rating from sector perform to underperform and slashed his price target to $34 from $54, which had been in line with Friday's closing price. After Tuesday's plunge, the stock closed at $51.06.

In an interview with CNBC's "Trading Nation," the analyst explained that he's projecting that both revenues and gross margins fall.

"If you put those things together, we get an earnings estimate which is $1.37, whereas the consensus numbers are a big range from $2 to $5," Sanganeria said.

The analyst added that "the big range in consensus tells you there is a misunderstanding on the company's earnings power, and that's what we are trying to point at, that there may be a disappointment in terms of earnings in 2016."

First Solar happens to be, for several distinct reasons, a very difficult company to value. It works on big projects, with revenue recognized over the course of many years. And the company recently announced that it will form a joint venture with competitor SunPower in order to generate a more stable source of revenue, a "yield co" called 8point3 Energy.

Sanganeria integrates his valuation of the 8point3 into his overall valuation of the company, mixing the joint venture's expected earnings into his earnings per share estimate, and applying a higher multiple of 25 times earnings to arrive at his price target. That is, if not for the improved earnings structure granted by the yield co format, he would use a lower multiple.

Other analysts use different approaches. Sven Eenmaa at Stifel Nicolaus, who has a target of $81 on the stock, assesses the core business and yield co separately, at $58 to $63 per share and $20 per share, respectively.


A worker cleans the panels in a solar power park run by the Costa Rican Electricity Institute (ICE) as the power company has managed to produce all of the electricity for the nation from renewable energy sources for more than 80 days straight on March 26, 2015 in Guanacaste, Costa Rica.
Joe Raedle | Getty Images
A worker cleans the panels in a solar power park run by the Costa Rican Electricity Institute (ICE) as the power company has managed to produce all of the electricity for the nation from renewable energy sources for more than 80 days straight on March 26, 2015 in Guanacaste, Costa Rica.

Eenmaa's revenue and gross margin projections are also well above RBC's, which means that ironically, his far higher price target is based on a far lower expected earnings multiple.

"It's a complex model," Eenmaa acknowledged in a phone interview with CNBC, "but I'm pretty comfortable with 20 percent-ish gross margins for the company."

The marketplace also seems to see both sides, with 9 percent of the stock's float currently held short, according to FactSet.

The huge gulf in the two analysts estimates may also have something to do with the information the company is providing.

"Right now, as you can tell from consensus estimates, we really don't know where exactly the company's core earnings power is," Sangangeria said. "And so we need to get more visibility, more clarity from the company. They have to come out and say these are the right numbers."

"But right now," he added, "I think there is plenty confusion where we think that we have done enough work to come up with a good estimate."


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