This will not be the first time you have heard this statement from 24/7 Wall St…  “Solar stocks may be nothing more than leveraged bets that react to sudden price moves in the price of crude oil.”  First Solar, Inc. (NASDAQ: FSLR) is the leader of the solar power sector, and it is due to report earnings after the close of trading on Thursday.  The recent price activity may be tied to or at least aided by the rapid rise in the price of oil.  But personal opinions aside, there is beginning to be the feel of a significant sentiment change on how to treat the company on its earnings.

We do not want to say that First Solar will impact every solar player out there on a generic statement, but we are going to look specifically at JA Solar Holdings Co., Ltd. (NASDAQ: JASO), Claymore/MAC Global Solar Energy (NYSE: TAN), PowerShares WilderHill Clean Energy (NYSE: PBW), MEMC Electronic Materials, Inc. (NYSE: WFR), Energy Conversion Devices, Inc. (NASDAQ: ENER), and SunPower Corp. (NASDAQ: SPWRA).  We have looked at developments here on each of these stocks.

Thomson Reuters is looking for $1.50 EPS on $579.72 million in revenues for its fourth quarter of 2009.  Estimates for the current quarter are $1.65 EPS on $555.93 million in revenues.  But here is where this gets interesting… the margins have been compressing as the cost per megawatt is heading farther and farther down, and that is expect to last through 2010.  If you compare 2009 to 2010 targets, the earnings are expected to be $7.35 EPS in 2009 and $6.38 EPS in 2010.  The revenues however are expected to grow from $2 billion in 2009 to $2.73 billion in 2010.  An expected 35% revenue growth, 13% earnings contraction… That is significant margin compression.  But the thing is that we already know this, and if the recent calls and price action are of any help then the bar may have been set very low here.

It was just last week when JA Solar Holdings Co., Ltd. (NASDAQ: JASO) managed to beat earnings and increase its forecast on shipments for 2010.  The day before that was out, First Solar closed down at $109.33, its lowest close going all the way back to March 9, 2009.  That matched the closing bell day when the freefall markets suddenly changed and turned around into a major bull market.

There are at least two backdoor ways to play earnings at First Solar via ETFs.
Claymore/MAC Global Solar Energy (NYSE: TAN) has it as the largest holding for more than an 8% weighting.  PowerShares WilderHill Clean Energy (NYSE: PBW) is heavily geared to solar, but it is more diversified and its weighting is approximately 2.5%.  Both of these ETFs have gone from formerly hot to ‘currently not.’

Even after the run last week and this week, First Solar is only up about 12%.  Sure, that is a stellar move on no organic news, but 12% for a solar stock is commonplace, particularly if you are talking about almost a week.  And now the company is under a new CEO for the first real quarter with his first real ability to give guidance.  This is sentiment changing.  Maybe it is just two days of Greece and Spain not leading the headline brigade for the bears.  Or maybe it is that the bar is set very low for the earnings report this week.

We saw a report from Broadpoint AmTech this morning reiterating a BUY rating with a $165 target on First Solar.  Broadpoint has higher estimates than Thomson Reuters consensus data at $594 million in revenue and $1.63 EPS.  John Hardy noted in his research call, “we anticipate that FSLR will report better than expected results for 4Q09, and that 1Q10 consensus estimates may be conservative.”

But Broadpoint AmTech also has some caution here for the next quarter, “We would point out our expectations for a significant decline in revenue and EPS in 2Q10 associated with deferral of captive projects. We do not believe consensus is modeling enough of a decline. While the gross margin continues to trend lower through 2010, EPS bottoms in 2Q10, making FSLR much more likely to grow earnings in 2H10 relative to peers in our opinion.”  The ultimate call is a positive one from Broadpoint AmTech: “we believe FSLR will outperform through uncertainty given its industry leading cost structure and earnings growth potential for 2011 associated with capacity ramp.”

If today’s price action remains firm, this will mark the fourth consecutive up-day for the stock.  That is not the case for Claymore/MAC Global Solar Energy (NYSE: TAN).

MEMC Electronic materials, Inc. (NYSE: WFR) has been a perpetual drag on the sector.  This was yester-year’s big backdoor solar stock.  Formerly materials for DRAM manufacturing, this is now a solar materials company.  Two weeks ago it gave guidance for a “a good year for MEMC.”  At $12.59, this is up from $11.60 before it gave its 2010 guidance.

Energy Conversion Devices, Inc. (NASDAQ: ENER) is the one component in solar that just is not jiving with a sentiment shift.  Not at all.  After a 3% drop to $7.62 today, this was a $10 stock as recently as January 26.

Both MEMC Electronic materials, Inc. (NYSE: WFR) and Energy Conversion Devices, Inc. (NASDAQ: ENER) have been tossed around as solar buyout candidates in the past.  This may be more hope than even real rumors.  Keep in mind that a buyout even at 100% premiums on each of these would still be leaving a large percentage of the shareholder base high and dry with major losses.  Both stocks are down so much from old oil-bubble highs that we won’t even remind you how bad they have been.

But the other sentiment change here is from SunPower Corp. (NASDAQ: SPWRA) recently making a large acquisition in Europe.  Our take on this is that the solar sector is in major need of consolidation.  Solar is supposed to be the Obama-winner sector for stimulus money and grants, yet these companies have no pricing power.  The big and strong need to eat and kill the weak.  First Solar still has a market cap of over $10 billion.  It has a new CEO that has a solid background, and it has almost $900 million in is latest balance sheet liquidity if you measure, cash, short-term investments and long-term investments.

A sentiment change is no guarantee that the market will react positively even to bad news.  But let’s see how fast the sentiment can change here even in a period of declining economics.  It was last March, on March 10, that I gave a list of energy stocks that could double by the end of the recession.  I put a $200 approximate price tag on it with the caveat of “these possible doubles by the end of 2010 are dependent upon the recovery having started by then.”  By the end of 2010?  The March 10 call reached the double by May 20, 2009 before the hot air again came out of the stock.  This is mnot a prediction of the same, but that is how fast sentiment can change.

JON C. OGG

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