Why I Am Short The U.S. Solar Industry

Includes: AMAT, FSLR, SPWR
by: Options Calling

Solar companies in the United States have faced a difficult year as they have struggled to keep manufacturing costs down and are now facing the fear of losing U.S. Federal Support through grants and loans as taxpayers and GOP politicians are now up in arms over the recent bankruptcy of Solyndra.

Republicans have been all over Solyndra, a U.S. solar panel manufacturer, who has filed for bankruptcy even after the fact that the U.S. Department of Energy approved a loan for $535 million and in turn the loan basically turned into a complete waste of an allocation of U.S. tax payers money during a time where U.S. fiscal spending has been the biggest issue of 2011. The big issue here is that Republicans are saying that White House Officials and Democrats knew that Solyndra was failing horribly but still allowed for Solyndra to refinance the loan in February of this year. The issue that caused Solyndra to go bankrupt was that the company couldn't lower manufacturing costs fast enough to compete and in turn ended up laying off 1,100 green employees and filed for bankruptcy in September, almost a year after receiving the over half a billion dollar loan and spending practically every dime.

It is no surprise that many investors will speculate that other U.S. solar companies and utility companies that have invested a lot in solar production will face similar issues in the coming quarter. The issue is that the price that U.S. solar panel companies are selling their products at are too low. Right now products, measured in watts for electricity, go for as low as $1.10/watt when they need to be exceeding $2/watt to be turning a profit. Making matters worse is that if U.S. solar panel company producers lose U.S. grants and subsidies they will have even higher production costs which will even plunge companies further into the red. GOP lawmakers are going as far as to say that the U.S. solar panel industry is doomed to fail and will not be able to compete with China and Germany, ranked number one and two respectively in investing in clean energy.

Applied Materials (NASDAQ:AMAT) makes factory equipment for the U.S. solar industry and is reporting a decline in sales for the first half of 2011. Sales for its solar division were recorded at $563 million for this year's third fiscal quarter, but this is a sharp decline from $637 million from the second fiscal, which is over an 11% decrease in sales in its sol)ar division. CEO of Applied Materials, Mike Splinter, says that government issues such as uncertainty of grants and loans and the decrease in the price solar companies are getting for selling their products are decreasing are leading reasons for the decline in the U.S. Solar Industry. George Davis, Applied's CFO, said during a conference call that, "We expect orders to be down again this quarter in solar. I'd say it's too early to call our fiscal fourth-quarter to the bottom"

It also looks like solar struggles are not localized to only U.S. markets. SunPower (SPWRA), which produces solar panels in Italy and Germany, reported a second quarter loss of $1.51 per share. Solar panel production company First Solar (NASDAQ:FSLR) had a huge drop in second quarter sales, nosediving in the second quarter by 61.6 percent with earnings of $0.70 per share versus $1.84 a year ago. First Solar has lowered its 2011 sales guidance by around $100 million in revenue a drop of .25 cents in yearly earnings.

I still see that long-term alternative energy will play huge roles in both the U.S. and Global economy but right now with high production costs, low sales numbers, and the threatening of a loss of funding from governments through loans and grants, gives me the confidence to short the U.S. solar panel industry for at least the second half of 2011.

Disclosure: I am short NRG.