Wednesday, April 30, 2008

Easy Money: Yahoo Arb; a Note on FSLR

Tonight, the WSJ reports that Microsoft leaked news that they're willing to pay $32 or $33 per share for Yahoo. Also, the article states that major Yahoo shareholders are seeking $35-37 and the Yahoo board wants "upper 30's."

It's trading up about fifty cents right below $29/share after hours, which is about a dime below the current offer. To me, going long seems like a no-brainer. A higher-priced deal is looking very possible, and even at $32, that's about a 13% gain from current prices. Since it's still only trading at the first deal offer price, there doesn't seem to be much downside (at this point; obviously, if MSFT walked away completely that would probably be a bad thing for YHOO shares).

I bought a small position at $27.9. Whether a deal gets done at $32, 33, 35, or 39, it's higher than what I paid. Hopefully it will be a quick, easy trade.

On another note, FSLR reported earnings today. The shares traded wildly; in premarket trading, shares were down about $20 (in the 265 range) and traded as high as $307 during the session, establishing a nice range for day traders.

I listened to the conference call this morning and was not impressed with anything I heard. Revenues and margins were both worse than the numbers last quarter, and they cautioned that margins would continue to fall over the coming quarters. They basically reaffirmed revenue estimates for next quarter (the "modest growth" they predicted should place the number within current analyst estimates), and raised them negligibly for the year (the old estimate was $950mil, and FSLR's new midpoint is $990mil).

As growth seems to have cooled from the previously-feverish pace, the current valuation looks more and more ridiculous. The current average 2008 EPS estimate is $2.53. Based on the slightly increased revenue estimate, favorable foreign exchange rates, but shrinking revenues, I don't think FSLR will earn more than $2.80 this year - and they could earn no more than $2.60. Based on current share price of $290, the P/E based on my 2008 estimate of $2.7/share is 107. In 2009, current estimates predict $5.11 in earnings; I'll be generous and give FSLR $6. Based on that number, the P/E multiple on 2009 is about 50.

Right now, eight analysts have "strong buy" ratings and 11 analysts have "buy" ratings on FSLR. I wouldn't be surprised if a few of them, especially ones with the strong buy rating, downgrade FSLR on valuation concerns. I certainly expect no upgrades; after the in-line performance and forecast, there is no reason to upgrade FSLR at this point.

I didn't cover my short position today. Hopefully, the stock put in a top at $307 today. FSLR does seem like a solid company, and I don't doubt the long-term prospects for the solar industry. However, as it has become clear that FSLR can't grow like the Incredible Hulk anymore, i believe that its time for shares to pull back.

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