Confidence in solar stocks falters


Other solar listings that took it on the chin included industry stalwart SolarCity, which was down 2.5% on Wednesday; SunPower, down 6%; Canadian Solar, down 3%; and Yingli Green Energy, down 1.5%.

The poor showing, particularly by China’s manufacturers, came as no surprise to Aaron Chew, vice president and senior alternative energy/solar analyst at the New York City-based Maxim Group, who had predicted days earlier that "Trina, Yingli, and the other Chinese stocks are on the verge of ending their rally.

"These companies are facing tough times. During the past two months, we have heard a lot of optimistic accounts about demand – but higher shipments mean very little if there are no price margins. Solar suffers from a paradox of price elasticity, in which higher demand only matters if there are larger margins."

Indeed, at this point, Trina has become a poster child for poor profitability. While its shipments were up 9%, year-over-year revenue was down 30.5%, and gross margin was just 1.9%. The Changzhou-based photovoltaic module producer lost US$1.23 (€0.94) per share – US$0.43 (€0.33) off what Wall Street had expected. The CEO cited price competition and a supply-demand imbalance – two factors that continue to play havoc with the solar industry.

According to Jesse Pichel, founder of New York City-based Pichel Cleantech Advisors, the Chinese manufacturers have dug a hole so deep it’s nearly inescapable. "The Chinese are buried in debt and need to be restructured," he commented. "There is some speculation that mergers will ensue, but that will not solve the overall problem of massive module oversupply."

First Solar flounders

However, much of the market damage was done by disheartening news released by First Solar after the final bell on February 26. The leading U.S. manufacturer reported that its outlook for the 1Q 2013 would not meet analysts’ projections. Although Wall Street had predicted sales of $825 million (€630 million) for the first three months of this year, First Solar said it anticipated receipts of only $650 million to $750 million (€496 million to €572 million).

The Tempe, Arizona-based company, which during the past year has begun to focus on the downstream side of the business, developing solar farms for utility providers, blamed competitive pricing and the loss of a project in India for its softer-than-expected outlook.

Nonetheless, the company listed several major achievements for the past fiscal year, among them:

First Solar intends to issue its full-year outlook along with its targets through 2015 when it holds an analyst day on April 6.

High hopes

First Solar aside, there were several possible reasons for optimism this month, but none of them panned out.

In the U.S., following President Barack Obama’s re-election and ringing re-endorsement of renewable energy in his State of the Union Address on February 12, there was growing chatter among analysts about additional avenues for solar investment.

Congressional support for such financing mechanisms had been in place since late 2012, when 29 lawmakers sent a bipartisan request to Obama, urging him to include master limited partnerships (MLPs) and real estate investment trusts (REITs) in his "all of the above" energy plan. The letter argued that renewable energy projects should be allowed to raise capital, in the same way that oil, gas and coal infrastructure projects already do. But by press time, no bankrolling had materialized.

What’s more, according to Maxim’s Aaron Chew, Obama’s recent reelection and subsequent support for the solar industry merely have served to maintain the status quo. "If [Republican Party nominee] Mitt Romney had won, the renewable energy sector would have had to take a sucker punch," said Chew.

Similarly, for a few days mid-month, solar stocks rallied across the board, as polysilicon prices finally appeared to bottom out – auguring greater stability for the industry. However, the gains could not be sustained, amid continuing uncertainty about the resolution to the trade dispute between the European Union and China.

While most industry analysts believe Europe would prefer to negotiate – and not to impose punitive tariffs – China’s stocks dipped drastically on the prospect that sales in such a key market might not continue apace. China exported over $25 billion (€19 billion) worth of solar panels to Europe in 2011, and counts on the region for a vast majority of sales.

Jesse Pichel said he is "assuming that the EU will not impose massive tariffs against the Chinese, thanks to political pressure from Germany, which is an export economy and does not want to start a trade war."

Sweet deals

Finally, within the past two months, two deals have boded well for America’s industry. First, on January 2, MidAmerican Energy Holdings, a subsidiary of mega-investor Warren Buffet’s Berkshire Hathaway company, agreed to acquire two projects in California from SunPower for a price tag between $2 billion and $2.5 billion (€1.5 billion and €1.9 billion).

The Antelope Valley Solar Projects will generate a cumulative 579 MW of grid-tied energy, which will be sold directly to Southern California Edison (SCE) under long-term power purchase contracts approved by the California Public Utilities. SunPower’s stock shot up about 40% on the strength of those transactions before First Solar’s downbeat report deterred industry growth.

Second, on February 20, SolarCity and American Honda Motor Co. announced a partnership geared to make solar power more affordable to the automaker’s customers in SolarCity’s 14-state service area – and to make solar EV charging available at Honda dealerships. Together, they established an investment fund to finance $65 million in solar projects to assist Honda and Acura customers in installing solar power with little or no upfront cost. SolarCity shares gained over 20% before they back-pedaled this week.

Again, Aaron Chew minimized the overall industry impact of the limited offer. "This deal was mostly symbolic. It says a lot about Honda’s belief in solar, but the two companies are not investing big numbers." Meanwhile, SolarCity is scheduled to report its Q42012 results after the market close on March 6.

So what’s next for solar? As Wall Street recoils from the latest reports, and investors suffer from whiplash and exhaustion, the industry awaits a definitive turning point. Solar may be down for now, but it’s far from out.

Disclaimer: The author does not own any stocks and will not be purchasing any in the near future. Furthermore, the information contained in this report is not intended to be investment advice. Investors should be cautious about any and all stock recommendations and should consider the source of any advice on stock selection.

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