How First Solar Lost More Than $10 Billion In Market Cap In One Year

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Shares in solar panel manufacturer First Solar are selling off this afternoon after the company reported its first loss as a publicly trade company yesterday as revenue declined some 12 percent.

But the weakness at First Solar is nothing new.

The company, which has been on a steady free fall since last summer, has lost more than $10.8 billion in market cap from its peak, laid off more than 30 percent of its workforce, and has closed production lines.

The sudden turmoil came on quickly for one of the leading U.S. solar firms.

A Lack of Leadership

In October of 2011, the company abruptly announced its Chief Executive, Rob Gillette, would step down less than two weeks after Solyndra said its CEO had resigned. Shares in the company fell 19 percent that day.

Solyndra offered a look at the solar industry's short comings and worried investors that similar problems plagued First Solar. 

The company operated with an interim leader,  Mike Ahearn, who made tough decisions to forfeit markets that he saw as not salvageable.

This week First Solar announced its chief commercial officer, James Hughes, would be its new chief executive.

Investors have not yet found a reason to stick with the company, particularly after a long search process.

"While we like the fact that the CEO search is finally over, we question the promotion from within, especially after conducting an external search for more than 6 months," Deutsche Bank's Vishal Shah says. "The company suggested that the board could not find a qualified candidate — possibly with strong international utility background — to take up the job."

The Fall Of Germany

In February, Germany's environment minister Norbert Roettgen said the country would cut subsidies supporting the solar industry by as much as 30 percent. 

The cuts, which had been expected, were far larger than the 15 percent decrease analysts had anticipated.

At its peak, Germany accounted for 46.8 percent of First Solar's core market installation capacity, built largely on  these feed-in tariffs and clean-energy laws.

Roettgen, in a joint announcement with Economic Minister Philipp Rösler, called for an acceleration of the contraction of instate-mandated photovoltaic incentives to April 1, three months earlier than planned.

"With the new proposal, the royalty rates are halved compared to 2009. In view of the past two years of greatly increased volume, is the re-adjustment of funding," Roettgen said. "The  goal is that in a few years, the photovoltaic market will be ready and make do without subsidies."

Without strong barriers to enter the solar market, competitors, particularly those in China, have rapidly built up capacity, pressuring profit margins at companies like First Solar.

"The solar industry is structurally imbalanced," First Solar CEO Mike Ahearn said on an investor conference call at the end of last year. "The easy re-entry of competitors will keep downward pressure on margins indefinitely."

The difficulties in Germany and much of its European business exacerbated troubles at First Solar, forcing it cut its workforce by some 30 percent in April, eliminating 2,000 positions across the company's global operations.

The company is now in the process of shuttering all of its operations in Frankfurt, Germany and plans to indefinitely idle some production lines in Malaysia, adding to reductions already taking place in Europe and the U.S.

First Solar hopes the layoffs will save it $30 to $60 million this year, and as much as $120 million a year in the future. 

"After a thorough analysis, it is clear the European market has deteriorated to the extent that our operations there are no longer economically sustainable, and maintaining those operations is not in the best long-term interest of our stakeholders,” Ahearn said at the time. “The solar market has fundamentally changed, and we are quickly adapting our market approach and operations to maintain and build upon our competitive advantage." 

First Solar Announces A Five Year Plan

First Solar has been rapidly trying to execute on plans to transition from these subsidized markets to a manufacturer for electric utilities. The company set a goal to derive nearly all of its new orders from this more sustainable market by 2016, along with new regions like the Middle East. 

During the most recent quarter, where it recorded an adjusted net loss of $0.08 a share on revenue of $497.1 million, First Solar laid out a five year plan to return to profitability. 

By 2016 First Solar is targeting some 3 gigawatts in sales through these sustainable markets. Specifically, the company will partner with utility companies and develop solar fields. 

"As a baseline, we are targeting, for the full year 2016 sales in the range of 2.6 to 3 gigawatts DC, which is the estimated annual module production capacity with our current factories in some of our spare equipment, with essentially all of the revenue coming from sustainable markets.

But Deutsche Bank's still views  Shah still calls First Solar a show-me story.

"In most markets, the appropriate policy frameworks are currently not in place or still uncertain. Even in India, one of the markets where [First Solar] is achieving good success, risks around local content requirements and financing costs remain," Shah says. "It is also unclear if [First Solar] would have any success penetrating the Chinese solar market, which could potentially become one of the most important solar markets over the next 5 years."

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