7 Solar Stocks Now Moving On A Sector Shakedown

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 |  Includes: ARVCF, CSIQ, FSLR, SPWR, SSNLF, STP, TSL
by: Cris Frangold

Even though its stock value has been on a roller coaster ride in recent weeks, First Solar (NASDAQ:FSLR) is showing some positive results. The demand for thin solar panels has been so good in Europe that First Solar has decided to keep its German plant open. It had been thinking of closing that plant down, but now it will stay open to keep up with orders.

Bloomberg Business Week also reported that First Solar sent out an email saying that it had closed a deal to build two plants for utilities in Australia. Details of the deal are not known, but the order should be a large one because it involves two power plants that could generate 159 megawatts of electricity.

The performance of First Solar's shares during the week was weird and dramatic. On Tuesday, share prices jumped up around 21%, but lost 3.4% of those gains or 50 cents a share the same day. The reason for the fall was a report by Jeffries & Company analyst Jesse Pichel, who noted that demand for solar panels is poor in Europe. Pichel evidently forgot to look at potential demand in other markets, such as Australia and Saudi Arabia.

This looks like a classic case of investors listening to an analyst rather than taking a look at a company's actual performance. It looks like First Solar could be posed for growth, despite the debt crisis in Europe. That means its shares should continue to do well, despite bearish pronouncements from analysts.

Other solar stocks, including SunPower (NASDAQ:SPWR), Trina Solar Limited (NYSE:TSL), and Suntech Power Holdings (NYSE:STP), also rose with First Solar. This seems to indicate that investors think solar has a future even if analysts don't.

Australia Could be Major Market for Solar

Australia could be the best hope for the solar industry and increased values in solar shares. The country down under is sunny and it is receptive to green energy. In addition to the First Solar deal, the Australian government has launched a project called Solar Dawn.

The project near Logan Creek in Queensland called Solar Dawn calls for the construction of an array to generate 250 megawatts of power. Solar Dawn will be a hybrid natural gas and solar thermal generator. It will be built by the French energy company Areva (OTCPK:ARVCF). The Australian federal government has budgeted $464 million for the project. The state of Queensland has added another $75 million.

This demonstrates that the Australian government is serious about solar and willing to spend big money on it. That's really good news for the solar industry because Australia could make up for losses in Europe. The Aussies certainly have the money to pay for solar panels and power units.

The rate of growth in Australia's economy is around 4%, according to the nation's Reserve Bank (the Aussie equivalent of the Federal Reserve). That actually beats forecasts. Employment and gross domestic product in Australia are actually increasing at a rate faster than what the economists predicted.

The growth in Australia's economy is being pushed by a huge mining boom. The main customer is China, which is buying almost all the minerals Australia can produce. The mining boom could benefit solar because the mines needs electricity.

Australia has also been given an AAA bond rating by agencies such as Moody's, so its government is in a strong position to borrow money for projects such as solar generating stations. The Australian government has a solar electricity program called Solar Flagships that is designed to develop solar power arrays in the country.

Massive orders of solar generation equipment from Australian could be what saves the industry, or at least keeps it going through the crisis in Europe. Companies like First Solar and Canadian Solar (NASDAQ:CSIQ) would certainly benefit from increased Aussie orders. Large-scale demand from Australia could also lead to higher earnings per share and better long-term cash flow.

Solar Panel Makers Could Get More Competition

Solar panel makers could soon be getting major competition that could lead to reduced market share and lower cash flows. Bloomberg reported that major LCD panel makers, such as Samsung (OTC:SSNLF), LG Electronics, and Foxconn Technology Company (2038 in Hong Kong), could soon enter the thin film solar panel industry.

This would be a real problem for solar panel specialists, such as Germany's Manz AG (M5Z) and First Solar, because of production costs. Manz's CEO Dieter Manz told Bloomberg that he think companies like Samsung could produce solar modules for about 30 cents a watt or less. First Solar's production costs are around 69 cents a watt, according to Bloomberg.

At those prices, firms like First Solar just could not compete. Manz told Bloomberg that he thinks giant electronics manufacturers would enter the solar panel market when demand reaches a level of 100 gigawatts.

Large-scale orders from countries like China and Saudi Arabia could prompt big consumer electronics to jump into the market. This could be a disaster for smaller solar makers because the big electronics companies have massive factories that can churn vast numbers of LCD devices, such as smartphones and flat-panel TV sets. Such plants could easily be converted to the manufacture of solar panels.

Companies like Samsung also have a lot more experience in consumer sales and deals with other companies. Samsung has been highly successful in marketing devices that operate on Google's (NASDAQ:GOOG) Android operating system. Foxxconn has built up a huge market share by manufacturing devices for companies like Dell (NASDAQ:DELL) and Apple (NASDAQ:AAPL).

Samsung and LG would be well-poised to enter the market for home and business solar panels. Samsung could easily enter into a deal with a company such as Solar City, which installs business and home solar panels. Australia could be a potentially huge market for such devices. The deal relationship between Samsung and Google could serve as the model for a future relationship between Samsung and Solar City.

If giants such as Samsung or Foxxcon start making solar panels, expect the share values of solar panel makers, such as Manz, Canadian Solar, and First Solar, to be devastated. Some of those companies could be driven out of the market completely by such massive competitors. Such companies could be forced into smaller niche markets and kept out of the consumer and commercial markets where the highest levels of growth are.

There could be an upside for smaller solar companies such as SunTech. They could become takeover targets for giant electronics manufacturers such as General Electric (NYSE:GE) and Samsung. Those companies would try to buy up such companies in order to get their patents.

The patents held by companies such as First Solar could actually be worth more than their sales or manufacturing assets. This was the case recently at Motorola, which was purchased by Google because of its patents. Motorola's electronics manufacturing business was actually worth less than its intellectual property, which consisted of 17,000 patents. Google was willing to pay $12.5 billion for Motorola.

So, stockholders in solar companies could eventually get their hands on some takeover cash. Such outfits could be worth more for their technology and expertise, as well as intellectual property rights than for their actual business. The entry of electronics giants into the solar field could be good news for stockholders. It could boost the value of solar companies seen as takeover targets.

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