The Day That Solar Went Dark

by: Bill Maurer

A couple of weeks ago, I wrote an article called "A Bright Idea: Get Out of Solar While You still Can." I thought the article was rather informative, as it detailed the latest downward revision from First Solar (FSLR). I also discussed how analysts had been taking down estimates on other solar names, such as Trina Solar (TSL), Canadian Solar (CSIQ), Suntech Power (STP), Sunpower (SPWR), LDK Solar (LDK), and Yingli Green (YGE). However, from most of the comments I received, many thought my view of the sector was terribly wrong and that I had no clue what I was talking about. I was simply cautioning investors that the next First Solar guidance update was going to be bad, just as the last couple have been.

Well on Wednesday, we got that update, and it was not pretty. I really don't like using the phrase "I told you so," but sometimes the analysts are right. I did not like the massive downgrades we were getting for earnings estimates, and I felt that they would continue. Here's an update on those revisions, and these numbers are before the First Solar update.

11/30 $7.47 ($0.11) ($0.15) ($0.61) $0.44 ($0.89) ($0.20)
Current $7.42 ($0.19) ($0.51) ($0.70) $0.41 ($1.02) ($0.24)
Change ($0.05) ($0.08) ($0.36) ($0.09) ($0.03) ($0.13) ($0.04)

Now these numbers are only in the past two weeks. Some of those revisions are close to a penny a day, or more. If you don't believe me that this means anything, here's how the revisions look over the past 90 days. Warning: these numbers are ugly.

11/30 $10.95 $2.06 $1.12 $0.44 $1.32 $0.65 $0.82
Current $7.42 ($0.19) ($0.51) ($0.70) $0.41 ($1.02) ($0.24)
Change ($3.53) ($2.25) ($1.63) ($1.14) ($0.91) ($1.67) ($1.06)

Have I made my point clear yet? Not really, since this was before Wednesday's terrible news. As we found out recently, First Solar was going to provide a guidance update for 2011 and 2012. Here are the highlights of what they said, just for 2011..

  • 2011 net sales in the $2.8 to $2.9 billion range, down from previous estimate of $3.0 to $3.3 billion.
  • Diluted EPS in the range of $5.75 to $6.00, down from previous estimate of $6.50 to $7.50.
  • Not included in those estimates are additional charges of up to $0.85 per diluted share, including $0.75 from impairments and accelerated costs of equipment, and $0.10 from severance charges from workforce reductions of approximately 100 people.

Now, if that wasn't bad enough for you, the 2012 projections look even worse for the company.

  • Net Sales in the range of $3.7 to $4.0 billion. Current analyst estimates are for $4.09 billion.
  • Consolidated Operating income of $425 to $450 million. This would be down from the currently projected $575 to $600 million in 2011. On August 4th of this year, 2011 operating income was projected to be $900 to $960 million.
  • Diluted EPS is expected to be $3.75 to $4.25. As noted above, current analyst estimates call for $7.42.

Now, that's only new for First Solar, here are some other bad pieces of news on the industry lately.

  • Backlash Against Chinese Solar Subsidies Could Hurt Suntech, Trina. The International Trade Commission may place import tariffs on Chinese solar panels because the companies are benefiting from unfair government subsidies.
  • Sunpower to Cut 125 jobs. The company is reducing its workforce as demand and prices are stagnating. 75 of the jobs will be lost in the US, and charges will be in the range of $9 to $17 million (about 80% cash), to be booked this quarter.

The news is getting worse by the week for these names, which is why I am continuing my stance of staying away from these names. We are going to see further estimate revisions off of this First Solar news, and I don't think Wednesday's decline in the sector has fully baked in what is coming. I know that stock prices, including First Solar, are down tremendously over the past few months, but just look at First Solar's 2012 estimates. In 90 days, we have gone from expectations of $11 to just $4. That's a huge drop, and I wouldn't be surprised if First Solar cut guidance again when it next reports earnings.

Now I'm sure there will be many criticizing this article as well, telling me that the news will be the bottom for the sector. If that is your opinion, you should be buying shares now. But I am not. I still think there is more pain to go, despite what we've already seen. As you can see from the following table, six of these seven names have seen huge losses since my last article on the sector. Only LDK Solar is up, and that's only because it issued some debt recently in the "hopes that the bond sale will improve finances." Many of these names are down double digits, percentage wise, and this table is only the past two weeks. There will be a day to start buying these names, but I do not think that today is that day.

11/30 $47.86 $8.00 $2.91 $2.48 $7.82 $3.55 $4.32
Current $33.45 $6.47 $2.32 $2.30 $5.30 $4.21 $3.61
Change -30.11% -19.13% -20.27% -7.26% -32.23% 18.59% -16.44%

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