This week First Solar (FSLR)  announced earnings of $567.3 million for the first quarter of 2011. This is a decline of 7.0% from the previous quarter, but is essentially the same as a year ago. Annual earnings are $2.56 billion, which is 15.7% greater than the same period a year ago. Earnings did beat analyst estimates, as First Solar has consistently done for years. So why did the stock price fall so dramatically on the news, a distressing 9.2% in one day from the previous high?

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There are many reasons to choose from, including a ho-hum level of guidance from First Solar on the earnings outlook for 2011 (investors have become accustomed to an increasing outlook from this company). Also, First Solar posted a decline in return on net assets. If this continues, it could be problematic for the company’s growth. But in the end I believe the stock price was getting ahead of itself and was plain overvalued.

From March 2010 to March 2011, FSLR reported $608 million in earnings. When this is divided by 87.05 million shares outstanding, then the earnings per share (EPS) is $6.98. When FSLR was trading around $135/share, this created a price/earnings (P/E) ratio of 19.33. While not an astronomical P/E, it is in the high range of where First Solar has been trading for the past few years. (Note that in June 2010, when FSLR was added to the Roen Financial Report’s Paradigm Portfolio, its P/E was around 15).

Trading at the $125/share level puts the P/E at a more reasonable level, though I would prefer the $100-$110 level before accumulating more shares.

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