More Downside Ahead for Solar - Barclay's

While solar stocks have plunged 60% over the last three months, there could be more downside ahead, Barclay’s solar analyst Vishal Shah warned this morning.

In a series of research notes, Shah cautions that the solar sector financial reports for the remainder of the third quarter reporting period “could turn out to be disappointing as concerns over potential inventory build triggered by [the] credit environment and FX headwinds prompt companies to maintain a cautious outlook on Q4 and [first half 2009] earnings.”

Shah notes that the solar companies he follows generate more than 90% of revenue from Europe. He says that for some companies selling into the European market in Euros and purchasing supplies in Chinese renminbi, gross margins could drop from over 20% in the first half of 2008 to well below 10% over the next several quarters. Shah also sees increasing risks of channel inventory build in Europe “as the credit markets outside of Germany completely frozen and even within Germany, large projects above 4 MW are likely to face greater difficulty in securing financing.”

Shah expect spot market prices for polysilicon, wafers and modules all to come under “significant pressure over the next few quarters.”

In Shah’s view, demand for solar panels will decline sequentially in both Q4 of this year and Q1 of next year, while supply is likely to rise 10-15% in each quarter. To avoid inventory build, he says module supply reductions would required of 20% in Q4 and 60% in Q1.

Shah says the 60% drop in in solar stocks has discounted some but not all fundamentals concerns; he sees further downside ahead. “Shares may not bottom until excess inventory has been worked through the channel,” he writes.

Shah today cut his ratings on both Suntech (STP) and Canadian Solar (CSIQ) to Underweight from Equal Weight. For STP, he chops his Q4 EPS estimate to 28 cents from 45 cents; for ‘09, he now sees $1.15, down from $2.35. His price target goes to - brace yourself, STP bulls - $11 from $60. Likewise, for CSIQ, his Q4 estimate is now 38 cents, down from 56 cents, while his 2009 estimate is reduced to $1 from $2.85. His price target for CSIQ is now $8, down from $18.50.

Despite the bearish call, both STP and CSIQ are trading higher this morning: STP is up $1.50, or 8.6%, to $19, while CSIQ is up $1.20 , or 12.4%, to $10.88.

Comments

[Buffett Jr:]

How many times do analysts have to be dead wrong before people start ignoring them? The time to downgrade was in May, not here at the bottom.

2008 Nov 03 12:07 PM

[User 182177:]

What is this analyst's past records? Another "buy high" and "sell low" type?

2008 Nov 03 12:22 PM

[User 182177:]

This link has some other folks' comments (near bottom).

blogs.barrons.com/tech...

2008 Nov 03 03:16 PM

[borisb:]

The timing of the downgrade on STP is hillarious! Its down 75% in 2 months and now you tell us there is a financing problem for the next 2 quarters? What about demand past that? What about Obama energy plan? We should rate Vishal timing as crappy!

2008 Nov 03 06:38 PM

[solarAce:]

as a solar installer about to get layed off because we can't get any more modules until Feb. supply increase ? HAHAHA

2008 Nov 03 08:45 PM

[User 213007:]

...sounds like Shah should be completely ignored; they obviously have a huge short position and are trying to cover themselves regarding this brief uptick we have seen begin last week in the solar industry. Spreading false information to influence a stock price is illegal. Shah should be investigated by the SEC!

2008 Nov 04 08:43 AM

[Road Runner:]

This is not new news. I'm bored.

2008 Nov 04 10:11 AM

[Timeline St...:]

It's awesome watching my CSIQ ticker go up!

In all honesty Eric, you need, in this order: (1) to be fired from any and all media sources who would give you a forum for your incompetence; and (2) psychological help to overcome the deep insecurity that makes you rain on everything while being continuously incorrect.

Here is the lineup today for those who are interested, all up, many in double digits!

Name Change
LDK Solar Co., Ltd. +1.43 (6.38%)
JA Solar Holdings Co., Ltd. (ADR) +0.60 (10.62%)
China Sunergy Co., Ltd. (ADR) +0.71 (15.54%)
ReneSola Ltd. (ADR) +1.18 (15.59%)
Trina Solar Limited (ADR) +1.58 (11.99%)
Solarfun Power Holdings Co., Ltd. (ADR) +0.98 (11.89%)
Yingli Green Energy Hold. Co. Ltd. (ADR) +1.07 (17.09%)
First Solar, Inc. +10.34 (6.39%)
Suntech Power Holdings Co., Ltd. (ADR) +1.28 (7.18%)

2008 Nov 04 10:23 AM

[Timeline St...:]

After seeing Eric's track record at Barron's, I've wondered.....does he actually THRIVE on being NEGATIVE and WRONG all the time? It would seem so.

Seeking Alpha editors, please have him removed. Look at today's stock moves for evidence of how someone can be maximally wrong. I suppose if you only care about page views, Eric may actually be good at generating those. But if you care about the very subject that is your namesake - investment gains - then please do what is correct.

2008 Nov 04 10:27 AM

[John Cordes:]

A gap between writing the article and publishing can be a bummer sometimes. GS downgraded the sector three weeks ago and I mentioned then that the crooks at GS obviously were preparing a large long position before the elections and earnings. More of the same, but a day late this time.

2008 Nov 04 10:37 AM

[vodop09798:]

Here we go again with the short shovers. When is the SEC going to take some lasting action.

2008 Nov 04 11:27 AM

[Jack Yetiv:]

Although the analysts are routinely next-to-useless, there is one part of the above that bears careful watching and which I think will be proven valid. Recall that several of these companies announced significant upside earnings surprises in previous quarters due largely to big Euro-based forex gains.

Given what the Euro has done versus the dollar in the past few months, investors should not expect any forex gains in Q3 (and probably even less so in Q4) and that could MATERIALLY impact earnings for CSIQ, STP and others.

In contrast, the strengthening dollar should actually HELP TSL's earnings in Q3 and Q4 because it uses the dollar as its functional currency. At the very least, the dollar's recent strength should limit (and probably eliminate) the forex losses that hurt TSL's Q1 and Q2. Indeed, TSL might even report a bit of a forex gain. Since these forex gains and losses can amount to 20-30 cents per share, their impact on stock price can be quite significant.

As to fundamentals of the solar industry, here are my brief thoughts (I will expand on these in an article at the end of November):

1) World demand will continue to be robust, largely because of the $17 billion renewable subsidy passed as part of the $700 billion bailout.

2) Polysilicon prices will drop 15-20% in 2009 compared to 2008 (and this has already begun in earnest in the spot market, although note that much poly is contracted for at agreed prices, so spot prices won't impact all poly bought).

3) ASP's will be 10-12% lower in 2009 versus 2008 (this has also begun).

4) Overall margins in 2009 will be maintained, but earnings growth will slow down for most companies from +50 to 100% to "only" 30 to 60% as production ramps slow and income taxes increase.

Jack Yetiv

2008 Nov 04 01:49 PM

[Garry:]

Shouldn't pick on Eric. He's only reporting the news. And a good job he does. Thanks Eric.

Sure seems like this forecast should have been offered at the end of August, not now. I'd like to see the actual analysis that is the basis for the opinion. It seems to me that the money's made when blood is in the streets. Like now.

Seems to me this analysis is almost as bad, not quite, as GS. They put out their sale at almost the exact bottom -so far.

Jack, good to hear from you again. I'm looking forward to your comments at the end of Nov.

2008 Nov 04 05:59 PM

[Timeline St...:]

@Garry - I disagree about Eric. He is consistently biased toward negative news. Have a deep look at how he covers Apple. If you didn't look at their financial situation and just read his reporting, you would think that they are circling the drain. This is a company that has built a cash hoard of $24.5 billion and that had non-GAAP revenue of more than $11 billion in the fiscal Q3. And that's not even their biggest quarter of the year - we're in it right now.

I also could be mistaken but I think that he added the last sentence after the article was originally posted.

My specific comments about this coverage of the solar industry have to do with the outlook. I'm not familiar with every stock, but can anyone please give me a decent reason why I shouldn't feel bullish about CSIQ for instance? I have looked at their financials and can't see a reason why they would not be a reasonable investment.

2008 Nov 05 11:09 AM

[Garry:]

Last I heard from CSIQ, their book to bill was at record. They had a good qtr, and they report later this month. I expect them to have a good qtr, good forecast and maybe the stock will still get hammered. But I think that they could have a great future beyond the immediate qtr. They should do well. We still disagree about Eric, I still see positive articles from him and I feel he is only reporting the news, not making it up. What about the analysts who change their "BUY" rating, when the stock is high, to a sell when the stock is off 60%? They should be out of a job. They are supposed to predict the future, not report the past.


On Nov 05 11:09 AM TimboM wrote:

> @Garry - I disagree about Eric. He is consistently biased toward
> negative news. Have a deep look at how he covers Apple. If you didn't
> look at their financial situation and just read his reporting, you
> would think that they are circling the drain. This is a company that
> has built a cash hoard of $24.5 billion and that had non-GAAP revenue
> of more than $11 billion in the fiscal Q3. And that's not even their
> biggest quarter of the year - we're in it right now.
>
> I also could be mistaken but I think that he added the last sentence
> after the article was originally posted.
>
> My specific comments about this coverage of the solar industry have
> to do with the outlook. I'm not familiar with every stock, but can
> anyone please give me a decent reason why I shouldn't feel bullish
> about CSIQ for instance? I have looked at their financials and can't
> see a reason why they would not be a reasonable investment.

2008 Nov 05 10:29 PM