Solar Looks Strong, But Expect Casualties


Earnings season has brought renewed optimism to the solar sector. Is it warranted? As with SunPower's (SPWRA) Q2 results, we’ll keep with our recent theme and find that digging into German-based SolarWorld AG’s (OTCPK:SRWRF) second quarter, reveals that results and guidance were not as upbeat as the press portrayed them and as the market reactions indicated. SolarWorld traded up Monday and sparked a rally in other solar stocks.

Revenues for the quarter of 225 million euros fell about 3% shy of consensus expectations of 233 million. Consensus expectations for the full year were for 1,017 million euros revenue, and so for the company to keep its guidance of one billion euros, it should not be viewed as a surprise. In 2008 revenues were 996.7 million euros, and so the guidance is calling for about a 10% year over year gain despite a larger capacity rise.

SolarWorld, like virtually all major producers, has added a lot of capacity recently. Reports said the company ran full in the first half. The industry is experiencing tremendous overcapacity at present. As one would expect, the result is that the industry severely cutting prices. One article refers to a 25% drop in industry prices H1 09 versus H1 08. SolarWorld AG's volume in MW was reported up 26% year over year for H1. Since SolarWorld had a first half sales drop of 4%, it would appear that SolarWorld was cutting prices by closer to 30% (26% plus 4%).

SolarWorld was able to cut costs enough to offset most of the price reductions, but how much more of this is possible in the second half. It is hard to believe that all producers will be as successful in slashing costs, and it seems likely to us that there were will be casualties in the world of solar PV during this downturn. Is that a buy signal for the group? We don’t think so.

Disclosure: E4 Capital holds no positions in the Solar sector.

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