How Bright Is This Solar Rally?

by: Bill Maurer

As the Dow has bounced nearly 600 points off Wednesday's low, solar companies have seen huge rallies in the past day or two. But we must wonder if this is purely a dead cat bounce. Remember, these stocks have seen their share prices drop 50%-70% over the past couple of months. You had to figure that any bounce would be quick and decisive. But if you have any profits, I would take them now.

The solar industry has been hit by hard times as governments have been reducing subsidies and smaller solar companies have been going out of business. The Solyndra bankruptcy and FBI raid did not help out confidence in this sector. So let's look at five names and see how they are doing. At the bottom of the article, I'll show you how much they've bounced in the past day or two, and how bad they have been hit.

First Solar (NASDAQ:FSLR): As I detailed about three weeks ago, First Solar is the #1 company in its industry, but that doesn't mean it's a great investment now. The company's last quarterly report saw heavy downward revisions in its financial guidance, and the stock has hit new lows each week. The report that First Solar would miss a Department of Energy loan covenant for a huge project out west hit the stock more. In just the past week alone, analysts have lowered EPS numbers by another percent for this quarter and next, as well as the full year and 2012. Estimates for the full year at $8.99 are now below the company's latest guidance of $9.00 to $9.25, and they could get even lower by the end of the month when the company reports. I would expect more downward revisions in the guidance from the company. However, with shares down 54% in the past three months and a forward P/E under 6, I'm starting to wonder how low this can possibly go. Look for this stock to struggle until we get some more direction from the company.

Sunpower (SPWRA): Sunpower is down 60% over the past three months, and its no surprise why. Analyst estimates for the current quarter have gone from $0.39 to $0.08, 2011 estimates from $1.36 to $0.87, and 2012 estimates from $1.85 to $1.22. About half of the analysts covering the stock currently have holds (17 of 33), with only five buys and 11 underperforms and sells. In the past three quarters, Sunpower's current ratio has dropped from 2.18 to 1.68, and the debt ratio (liabilities to assets) has gone from 50.9% to 55.2%. The company actually lost money last quarter, which hasn't happened in a while. Stay away for now.

Suntech Power (NYSE:STP): Suntech is down 70% over the past three months, and that includes the 40% rally we've seen from Monday's low. Yes, I said 40% rally. This company has missed earnings estimates in three of the past four quarters, and revenues are expected to drop in 2012 from 2011. Not a good sign. Estimates for the third and fourth quarters have been revised from profits in the low 20 cents to losses in the 10 to 20 cent range over the past three months. In the same time period, 2011 estimates have gone from an 82 cent profit to a 23 cent loss, and 2012 estimates have gone from an 88 cent profit to 32 cent profit. The company's margins are half to a third of First Solar's, but this stock commands a 30% premium if valued off 2012 earnings. If I thought that markets would be rational over the next year or so, I'd almost say that's a great arbitrage opportunity with First Solar.

Trina Solar (NYSE:TSL): Similar to Suntech, Trina is another China-based solar company that's down 70% over the past three months, and has rallied 43% in the past day and a half. Analysts are a little more bullish on Trina than Suntech, and the company is still projected to be profitable this year and next. Quarterly estimates and full year estimates are down about 60-65% over the past 3 months, but like I said, still projected for profitability. And while Suntech was forecasted for 11% revenue growth this year and negative 3% next year, Trina is currently at 28% growth this year and 1% growth next year. With a forward P/E of just 4.56 (Suntech is 7.44), I like Trina as the best China solar play, but that's not saying much right now. I wouldn't buy right now, and if you can manage to catch another one of those 43% day and a half rallies, take profits right away.

Canadian Solar (NASDAQ:CSIQ): Canadian Solar has suffered a similar fate to the rest of its peers. Down almost 70% in the past 3 months, it has seen its estimates slashed by comparable amounts. Its revenue growth prospects are roughly in line with those of Trina Solar, but almost every analyst covering the stock has a hold currently, and I think this is fair. There haven't been any analyst rating changes in about 6 months though. The company has also seen its current ratio and debt ratio worsen in the first half of 2011. At a forward P/E equal to Trina, it has a compelling valuation, but I suspect that it will head lower soon along with the rest of the sector.

As you can see from the table below, these stocks have rallied substantially off their lows in the past day or two. However, this is only a drop in the bucket of losses that have been accumulating over time. For now, I would rate this entire sector a hold, but in another 3-6 months, I might start to take a closer look, if valuations get ridiculously low.

Name Ticker Low Current Change 3-Month Change
First Solar FSLR $55.68 $60.87 9.32% -53.92%
Sunpower (Class A) SPWRA $6.60 $7.78 17.88% -59.94%
Suntech Power STP $1.70 $2.38 40.00% -69.37%
Trina Solar TSL $5.28 $7.53 42.61% -64.30%
Canadian Solar CSIQ $3.05 $3.65 19.67% -68.18%

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.