"Expect C4Q09 upside. We expect FSLR to report C4Q09 results at the high end of guidance, rev/EPS could track closer to $600mm and $1.60+, versus street cons at $579mm and $1.50. Upside in 4Q09 should be driven by: (i) System project completions of 45MW – expect system revenue upside to high end of guidance; (ii) FSLR’s unhedged euro assumption of $1.45 has slight upside to ~$1.48; (iii) FSLR had built over 50MW of inventories from 1Q09-3Q09 – draw down of inventories to meet Q4 demand would help; (iv) FSLR’s module gross margin guidance of 50-51% (versus 50.9% in 3Q09) could have upside from lower rebates.
Negatives since Dec analyst day. (i) German uncertainty: German FiTs are likely to decline 16% for roof-top and 15-25% for ground mount; (ii) European macro uncertainty: Sovereign credit risk among some European countries has led to a sharp decline in value of Euro versus the dollar – the Euro is now at $1.37 versus FSLR’s 2010 guidance assumption of $1.40; (iii) US pipeline uncertainty in 2H10: Some newsflow on delays in approvals of some FSLR pipeline projects in US.
Positives since Dec analyst day. (i) Sentiment: FSLR stock has pulled back ~10% since Dec 17 analyst day, and investor sentiment appears quite negative following news of accelerated German FiT declines on Jan 14; (ii) Near term demand strong: Channel checks have consistently suggested Q4 and Q1 solar demand is extremely strong given demand pull ins in Germany; (iii) FSLR pricing upside: FSLR projects appear to receive premium pricing at system level compared to Chinese c-Si projects; (iv) France strong: EDF-EN had fairly positive comments on solar intent."
It is the technical picture where a lot of difficulties reside. First, take a look at the declining resistance line from June 2009. Stock has not been able to break above this resistance and there is no reason to believe it will after the earnings. It currently stands at $133.
Second, when company reported 1Q09 earnings, the stock made a $36 or 23% move; 2Q09 report made a $19 or 11% move; 3Q09 report made a $25 or 17% move. Despite all this volatile history, the at-the-money straddle this time for 4Q09 earnings is going for only $10 which implies an 8.5% move, even with sharply elevated implied volatility of 136 in Feb vs. 55 in March.If history is any guide, then it looks like straddle is cheap and should be bought going into earnings. However, with one day left to expiration, if there isn't a big enough move the straddle will go poof, and that's too much risk for a trade. So, I am going with the following double diagonal calendar spread:
- Buy to open March $130 calls
- Buy to open March $110 puts- Sell to open Feb $130 calls
- Sell to open Feb $110 puts
I just filled my order for net debit of $4.40. The P&L and daily charts are attached.
Good luck!
