Energy

Solar Outlook, Rough Seas In Margin Contraction (TSL, YGE, FSLR, SPWRA, TOT, STP, CSIQ, JKS, LDK, TAN)

Last week’s action in the solar sector was not just a reaction to a poor earnings reports from Trina Solar Ltd. (NYSE: TSL) and Yingli Green Energy Holding Co. Ltd. (NYSE: YGE). For these and other solar players the news was generally as bad or worse. And the cause of the declines is essentially the same.

Only First Solar Inc. (NASDAQ: FSLR) and SunPower Corp. (NASDAQ: SPWRA) were able to hold on to finish the week slightly better than flat. First Solar did come down about -5% from a weekly high, and SunPower’s pending majority takeover by Total SA (NYSE: TOT) keeps the company’s shares from moving much. 

Suntech Power Holdings Co. Ltd. (NYSE: STP) and Canadian Solar Inc. (NASDAQ: CSIQ) closed out the week down about -4% and -7% respectively. Trina was off more than -10% and Yingli was down nearly -15%. Jinko Solar Holding Co. Ltd. (NYSE: JKS) fell about -13% in the week. The week’s biggest loser, though, was LDK Solar Co. Inc. (NYSE: LDK) down about -22%. Even the Guggenheim Solar ETF (NYSE: TAN) was off down more than -5%.

While some of these solar players are not changing their forecasts on shipments, all have seen gross margin declines since last year, and the capacity expansion that is taking place this year will only make matters worse for margins. Capacity is expected to grow by 9,500 megawatts in 2011, to a worldwide total of 41,500 megawatts, while global demand for solar panels is forecast for around 28,000 megawatts.

LDK Solar revised its first quarter and full-year forecasts last month, but the company failed to complete a debt offering last week, even though it reiterated its latest forecast. LDK expects margins of 30%-31% in the first quarter, falling to an average of 24%-29% for the full year.

The second weight on share prices is a fuller understanding of just how much many of the solar makers depend on European sales, particularly Germany, Italy, and Spain. With that understanding comes the realization that both Italy and Spain are suffering from bigger problems than continuing solar subsidies, and that German sales will not be robust as before.

Sales in the US and China, which were expected to make up for a good portion of lost sales in Europe, could also be weaker as the economic recovery in the US continues to limp along and inflation and tighter capital controls keep the pressure up on China.  Austerity and government spending could easily become factors here the U.S. and ultimately in China.

The bleeding isn’t over yet for LDK Solar, which has lost another -3% in the first half-hour of trading this morning. The shares are trading at $7.03, within a 52-week range of $4l.97-$15.10. Trina shares are off about -2%, at $21.51, within a 52-week range of $14.85-31.89.

The good news about the leaders in solar now is that shares of these are well off of highs on a long-term basis and on a near-term basis.  The valuations in sales, earnings, and even in total asset values even has some investors starting to look at the solar sector for value stocks.  We can’t get this contrarian today, but the negative sentiment and negative trends along with deep value might even be a contrarian investor’s delight. 

Paul Ausick

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