Like the sudden sunlight and calm that temporarily replaces the mayhem when the placid eye of the storm finally passes overhead, the final two trading days last week gave stocks in the much-battered solar panel manufacturing sector a brief reprieve from months of price-crushing declines. The deluge, sadly, is far from over.
Fueled by the wider Eurozone summit rally, industry-specific news out of Germany and a trader-driven assessment that stock prices might have reached technical bottoms, shares in various solar panel manufacturers surged Thursday and Friday. The Claymore/MAC Global Solar Index, an industry benchmark, was up 14.85 percent in two days. From the first day of May until Wednesday, by comparison, the index had lost fully 62.5 percent of its value.
Disappointing industry developments, the possibility of negative surprises coming out of China, and the increasingly unforgiving economics of the business, however, mean the sector could face a very stormy fourth quarter, several analysts interviewed by the International Business Times agreed.
“In general, I would expect this to be one of the most challenging quarters for solar energy in recent memory,” said Jeff Bencik, a senior analyst in the green technologies sector for investment banking and advisory firm Kaufman Brothers.
According to the Bencik, oversupply, which has led to a rapid decline in the average sale price for solar modules, has affected bottom lines across the industry. “Most of the industry participants simply can’t cut their cost fast enough,” he said, noting the cost paradigm that plagues the sector as the average selling prices for solar modules keep dropping.
Hari Polavarapu, a managing director for solar and clean tech research at institutional broker/dealer Auriga USA, agrees with Bencik on the oversupply issue. He says it’s all a result of the government policies implemented by the People’s Republic of China which, in his view, “misprices capital” and “backstops inefficiency” by offering companies based there access to loans at rates considerably under the market standard. The resulting distortions prop up what Polavarapu calls “a whole crowd of zombie companies” while directly contributing to the demise of companies outside of China, like Massachussets-based Evergreen Solar, which filed for bankruptcy in August.
“Primarily, to some extent, you are not competing against the Chinese companies, you’re competing against China,” said Polavarapu.
Indeed, the past month has seen a string of bad news from American and Canadian manufacturers that seem to validate his point. On Wednesday, Arizona-based industry giant First Solar, Inc. (NASDAQ:FSLR) pre-announced disappointing earnings, firing then-CEO Rob Gillette. Most worryingly, the company announced guidance on its fiscal year 2011 net sales between $3.0 and $3.3 billion, a steep drop from the $3.6 billion figure it had previously stated, and which itself had been revised down from $3.7 billion earlier in the year.
Earlier in the month, on October 17, Ontario-based Canadian Solar Inc. (NASDAQ:CSIQ) revised its third-quarter gross margin guidance downward to a range of between 2% to 5%, versus its earlier forecast of 9% to 12%. The same day, Connecticut-based STR Holdings, Inc. (NYSE:STRI) withdrew its full-year 2011 guidance “due to the lack of clarity regarding global demand for solar products during the fourth quarter 2011.”
That followed an announcement from California-based SunPower Corporation (NASDAQ:SPWRA), another solar panel manufacturer, which said October 4 it would lower its full-year forecast on November 3.
And that might just be the tip of the iceberg, analysts say. An even bigger concern is that many Chinese companies will soon be following their New World counterparts in announcing disappointing expectations. Even worse, the companies, not known for a culture of investor transparency and feeling that the implicit government support insulates them from the wrath of the market, might not even bother to pre-announce guidance, releasing earnings substantially below analyst expectations without firing that customary warning shot.
That would follow a pattern established earlier in the year, when Chinese outfit LDK Solar, Ltd. (NYSE:LDK) lowered its revenue guidance by a whopping 29.5 percent (to between $480 and 500 million from a prior estimate of between $710 million to 760 million), making the announcement only 10 days before earnings were to be released.
One analyst, Gordon Johnson of Axiom Capital, has publicly predicted China-based Trina Solar Limited (NYSE:TSL) will issue negative guidance ahead of its third quarter earnings.
“There are companies that have disappointed much more frequently,” said Bencik, referring to the Chinese outfits.
Not everyone is bearish on solar. Indeed, even though some analysts interviewed noted trader-driven technical factors outside market fundamentals were likely helping the rally, all resisted calling the current rally a “dead cat bounce,” Wall Street slang for a seemingly counterintuitive jump in the share price of a stock that has been previously battered.
Ben Z. Rose, an analyst at Battle Road Research noted that while “the industry remains in a funk,” the current “relief rally” did have some logical underpinnings.
“As a result of the news from Europe, you could make the argument that if the banking systems there are stable, governments there would feel better about subsidizing solar.”
Polavarapu noted a tariff decision out of Germany, which will incentivize production in the short-term, could be seen as helping drive stock prices up.
But that does not mean hope for the longer term. Polavarapu, who made a point of noting he was more bearish than other analysts earlier in the year, noted the unsustainability of the current model deeper into the future.
“The street has increasingly realized that [earlier expectations] might not come true,” he said, adding “The underlying economic argument is there: the cost paradigm will have to go down.”