We have long been advocates of a market economy and believe that the “invisible hand” of the market should for the most part be allowed to allocate capital and resources without undue government influence. Thus, while we are fans of all forms of alternate/green energy in the abstract we have a built-in bias against forms of alternate energy that exist in the market only because of government mandates and/or government supplied tax credits/incentives. Certainly ethanol falls into that category. Likewise we would submit that for the most part solar power (except for certain niche applications) would also fall into the same category as an energy form that cannot currently stand on its own merits without government mandates and incentives.
Be that as it may, even die hard solar fans must concede that solar stocks are in the midst of a full-fledged bear market. We think it is likely that the solar industry will face two important headwinds that will last for quite some time thereby undermining any hoped for near-term recovery, i.e., reduced government tax incentives and customer financing. Unfortunately for the solar industry, Europe (particularly Spain, Italy, and Greece) have been among the most generous sovereign nations when it comes to providing governmental sponsorship and the providing of tax credits and other incentives. Our thought is with the European sovereign debt crisis and the mandated austerity programs that are being implemented across a large part of Europe that solar will likely lose a substantial portion of its tax incentives as governments move to close tax “loopholes” to mitigate increasing tax rates. Additionally, with the sovereign debt crisis in Europe now beginning to have an outsized impact on the European banking system we feel that customer financing to fund solar projects will become problematical at best. Being unable to see an end to these two major headwinds anytime soon we are forced to make the call for a continuation of the secular bear market for the solar industry as a whole to continue for the foreseeable future. That being said certain industry participants have a level of attraction and there will be ample trading opportunities due to the high beta of the group.
As evidenced in the recent quarterly earnings reports we see a worsening sea of red ink, a continuation of reduced guidance and an increase in inventory write downs, all of which should eventually lead to industry consolidations and bankruptcies of individual companies. We do not envision revising our outlook on solar until the consolidation and bankruptcy phase is largely complete, which (together with continued technological advances to make solar more cost competitive) should set the stage for a powerful bull market in solar stocks. Finally, to throw a few breadcrumbs to current bulls we would note two things that caught our eye recently, first last Tuesday solar stocks actually had a good day in a down market even though four or five solar companies reported (all negative and with reduced guidance) after the close of trading on Monday or pre-market on Tuesday and secondly a “marquee” name, Google (GOOG), threw in the towel on its solar initiative last week. Both of those events indicate we may be getting closer to the end of the solar bear market.
While we await those developments we thought we would examine ten solar companies and their outlooks. Here are the first five solar companies that we have included in our review:
Canadian Solar Inc. (CSIQ)
Canadian Solar designs, develops and manufactures solar products internationally. The company has its headquarters in Canada, but has its manufacturing facilities and R&D operations in China. The market cap is approximately $100 million and the stock has an average daily trading volume of 1.1 million shares. The company reported Q3 earnings November 22, beating slightly on revenue but disappointing on EPS by delivering a loss of ($1.02) versus consensus of (0.39). The company reiterated its full-year shipment forecast and announced it will rein in its capital expenditures budget. We do have concerns about the high level of short-term borrowing and wonder if the company could survive independently if one or more of its banks elected not to renew its credit line or instituted restrictive covenants. The stock is down 85.9 % from its 52-week high of $16.79. Red ink is forecast for both this year and next.
First Solar, Inc. (FSLR)
First Solar is an U.S.-based company that designs, manufactures and markets photovoltaic solar power systems and solar modules using a thin film semiconductor technology. The market cap is $3.85 billion and the stock has an average daily trading volume of 3.8 million shares. The company reported Q3 earnings November 23, with revenue of $1.005 billion that was up 26 % year over year and net income of $196.5 million, which was up 11% over last year. First Solar in our mind clearly had the best report of any of its peers. First Solar has some of the best technology in the world and is one of the few solar companies still reporting profits. With the release of the Q3 results the company guided for FY 2011 net sales of $3.0 – $3.3 billion and operating income of $650 -$750 million with fully diluted EPS of $6.50 to $7.50 and announced it will reduce capex going forward. This company is extremely well run and should definitely be one of the long-term survivors (and leaders) of the solar industry [provided of course that the company is not first acquired by General Electric (GE) as per the recurring rumors to that affect]. The stock is down 74.6 % from its 52-week high of $175.45.
JA Solar Holdings Co., Ltd. (JASO)
JA Solar is a Chinese company that designs, manufactures and markets photovoltaic solar cells and solar and solar products. The company has a market cap of $275 million and the stock has an average daily trading volume of 5.1 million shares. JASO reported Q3 earnings November 22, beating on revenue but reporting a $0.36 loss, which was 33 cents worse than the consensus of ($0.03). Additionally, the company provided lower shipment guidance for the balance of the year. JASO’s OEM business model likely puts the company at risk of a larger-than-industry-wide volume decline – much in the way semiconductor fabricators under perform during declines as customers switch production to in-house facilities with newly available capacity. We would continue to avoid JASO shares. The stock is down 80.5 % from its 52-week high of $8.57.
JinkoSolar Holdings Co., Ltd. (JKS)
JinkoSolar is a Chinese company that manufactures and sells solar power products. JinkoSolar has a market cap of $126 million, is listed on the NYSE and has a stock that trades an average daily volume of 971,000 shares. JinkoSolar announced Q3 earnings November 21. Revenue was $279 million (up year over year but down sequentially). And diluted loss per share was $0.47. Gross margins fell off a cliff at 3.7% compared with 25.4% for the prior quarter and 33.5% for the year-earlier quarter. The company provided guidance that Q4 revenue should fall to $180 to $210 million from $279 million for the quarter just completed. The company was subject to violent protests and had to temporarily shut its eastern China plant September 17, following toxic waste releases. The company was able to resume production at the facility October 11. The stock is down 83.1 % from its 52-week high of $32.21.
LDK Solar Co., Inc. (LDK)
LDK is a Chinese company that designs, develops, manufactures and markets photovoltaic products. LDK has a market cap of $448 million and has a stock that trades an average daily volume of 2 million shares. LDK reported Q3 earnings November 22, missing on both earnings (loss of $0.87 vs. $0.46) and revenue ($472 million vs. $499 million). The company estimates Q4 revenue in the range of $440 -$520 million. This is a company that we worry about; for us management has historically been a concern (we have never been able to forget the various Barron’s “exposes” regarding LDK’s inventory from several years back). We would note that Collin Stewart reiterated its Sell rating on LDK post earnings saying, inter alia, that the large net debt position leaves little value in LDK’s equity. This is one solar company that we would choose to avoid. The stock is down 77.2 % from its 52-week high of $14.97.