Shares within the beaten down solar industry enjoyed their best day in months on Wednesday after a report that prices may be starting to stabilize for the sector.
This is what caused the huge rally:
Avian Securities analyst Mark Bachman said "polysilicon was selling for about $30 a kilogram on the spot market after bottoming at around $24. He noted, however, that solar cell and panel prices are still dropping and said more companies will need to go out of business this year to ease the industry's massive oversupply."
Now, the second part of that statement is what is troubling. "More companies need to go out of business to ease oversupply."
That is a very worrisome statement. As everyone knows, there is just too much supply right now. Solar companies are keeping inventory levels low, and if December sales numbers are as reported by these analysts, prices could start to bottom in Q1 if installers panic and start a buying rush.
Now, I've been a noted bear on the sector recently, and that was very evident in my latest article, The Day That Solar Went Dark. That day, First Solar (NASDAQ:FSLR) warned on its fourth quarter earnings, and that sent shares of the entire sector plunging. First Solar is the biggest name in the industry, meaning it has the most to lose. As of Thursday morning, the company is off 77% from its 52-week high, above $175. It now trades for less than $40, and its recent low was under $30.
Now, we've seen multiple big warnings from First Solar over the past couple of quarters. At the beginning of 2011, First Solar was predicting over $9 in earnings for the year. Now, they are under $6 on its estimates. Despite revenue expected to be up nearly 28% in the fourth quarter over last year's period, earnings are expected to decline from $1.80 to $1.56. For the full year, revenues are expected to rise 12%, but earnings per share are expected to decline from $7.68 to about $5.85. The numbers get worse in 2012. Despite estimates for 31% revenue growth, earnings are expected to decline to a current estimate of $4.19. If that doesn't tell you what's wrong with the sector at the moment, I don't know what will.
Now, First Solar and its peers have rallied hard from their recent bottoms, with much of those gains on Wednesday. The following table shows their rallies from their recent lows, and their falls from their 52-week highs (note: all price data from here based off prices at 10:15 am ET on Thursday morning). For comparison purposes, I am staying with the following group of seven that I've used over the past three months: Trina Solar (NYSE:TSL), Canadian Solar (NASDAQ:CSIQ), Suntech Power (NYSE:STP), Sunpower (NASDAQ:SPWR), LDK Solar (NYSE:LDK) and Yingli Green Energy (NYSE:YGE).
Now those gains include the declines we saw on Thursday morning, which were in the mid to upper single digits, percentage wise. Wednesday's rally was huge, and I think many people realize that it was too much. Lots of people are taking profits, and I would expect more of those gains to be given up over the next few days. Here is how the stocks traded, again, as of 10:15 Thursday morning.
So where do we go from here? Well, I'm not sure we've hit a bottom, not quite yet. While it does appear that polysilicon prices are starting to level off and perhaps bottom, there is still a huge oversupply in the industry and panel prices are still coming down. I think we could see one or two more warnings from First Solar, but I think we are getting closer to a bottom. We're just not there yet. I always give an update on analyst expectations, so here's how the 2012 earnings estimates have been coming down lately.
Obviously, First Solar's numbers came down the most since my last update due to their warning for 2011. However, for the most part, most of the declines have lessened in intensity lately. We are still declining, though, and I don't see estimates going up at all. Like I said before, I think we are one or two more quarters from a bottom. We are getting there, but not there yet.
Wednesday's rally was a positive sign for the sector, but I would have liked to seen a better day on Thursday. Estimates are still coming down for these names, and we still have a lot of oversupply. Many of these names have high debt loads, and if they are expecting to lose a ton of money in 2012, you might find them needing to raise capital. That most likely would be in equity, meaning share dilution is possible. Solar stocks are closer to bottoming, and that's a welcome sign, but don't buy yet. Not after they've rallied so hard. These gains can evaporate quickly, and Thursday morning is a good indication of that.
I think these names will go a little lower from here, and it's quite possible that they retest their lows before a true bottom is put in.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.