Anyone looking for a sad story to tell need search no further than the solar PV sector. Manufacturing over-capacity and lower government subsidies led to a price collapse of about -50% last year. Solar makers watched their margins collapse to negative numbers in most cases, and the worst news is that the shakeout in the industry hasn’t even started yet among the top-tier players.

Our review of the sector includes three equipment and component suppliers and seven solar panel makers: Applied Materials Inc. (NASDAQ: AMAT), MEMC Electronic Materials Inc. (NYSE: WFR), GT Advanced Technologies Inc. (NASDAQ: GTAT), First Solar Inc. (NASDAQ: FSLR), SunPower Corp. (NASDAQ: SPWR), Suntech Power Holdings Co. Ltd. (NYSE: STP), Trina Solar Ltd. (NYSE: TSL), LDK Solar Co. Ltd. (NYSE: LDK), JA Solar Holdings Co. Ltd. (NASDAQ: JASO), and ReneSola Ltd. (NYSE: SOL).

Rather than looking for value plays in the industry perhaps we should instead look for potential survivors. At least five German solar PV suppliers have filed for bankruptcy and there have been reports that several of the second-tier players in China are failing as well. One German maker, SolarWorld AG, is leading an anti-dumping action against more than a hundred Chinese makers, and an initial ruling has imposed tariffs of around 35% on Chinese-made panels sold into the US. That won’t do anything but dampen demand further and cost US jobs in the solar panel installation business.

Applied Materials Inc. (NASDAQ: AMAT) traded at $10.47 and has a market value of around $13 billion. The consensus target price from Thomson Reuters is $13.64 and the 52-week range is $9.70-$13.94. Three months ago the target price was $14.47. Applied Materials has a dividend yield of 3.4%. The implied upside to the consensus target is 30%, and we note that the target is below the 52-week high.

MEMC Electronic Materials Inc. (NYSE: WFR) traded at $1.64 and has a market value of around $365 million. The consensus target price from Thomson Reuters is $5.24 and the 52-week range is $1.53-$10.61. Three months ago the target price was $6.14. MEMC does not pay a dividend. The implied upside to the consensus target is 220%, and we note that the target is far below the 52-week high.

GT Advanced Technologies Inc. (NASDAQ: GTAT) traded at $4.02 and has a market value of around $485 million. The consensus target price from Thomson Reuters is $8.82 and the 52-week range is $4.00-$17.50. Three months ago the target price was $12.70. GT does not pay a dividend. The implied upside to the consensus target is 120%, and we note again that the target is far below the 52-week high.

First Solar Inc. (NASDAQ: FSLR) traded at $14.42 and has a market value of around $1.2 billion. The consensus target price from Thomson Reuters is $25.29 and the 52-week range is $13.21-$142.22. Three months ago the target price was $43.55. First Solar does not pay a dividend. The implied upside to the consensus target is 75%, and we note again that the target is far below the 52-week high.

SunPower Corp. (NASDAQ: SPWR) traded at $5.23 and has a market value of around $615 million. The consensus target price from Thomson Reuters is $8.79 and the 52-week range is $4.94-$23.36. Three months ago the target price was $9.70. SunPower does not pay a dividend. The implied upside to the consensus target is 68%, and we note again that the target is far below the 52-week high.

Suntech Power Holdings Co. Ltd. (NYSE: STP) traded at $1.83 and has a market value of around $331 million. The consensus target price from Thomson Reuters is $2.39 and the 52-week range is $1.70-$8.50. Three months ago the target price was $2.57. Suntech does not pay a dividend. The implied upside to the consensus target is 31%, and we note again that the target is far below the 52-week high.

Trina Solar Ltd. (NYSE: TSL) traded at $5.83 and has a market value of around $408 million. The consensus target price from Thomson Reuters is $7.87 and the 52-week range is $5.01-$23.64. Three months ago the target price was $9.15. Trina Solar does not pay a dividend. The implied upside to the consensus target is 35%, and we note again that the target is far below the 52-week high.

LDK Solar Co. Ltd. (NYSE: LDK) traded at $2.53 and has a market value of around $347 million. The consensus target price from Thomson Reuters is $2.27 and the 52-week range is $2.54-$7.75. Three months ago the target price was $3.25. LDK does not pay a dividend. The current price is above the consensus target, but still below the target price in February and well below the 52-week high.

JA Solar Holdings Co. Ltd. (NASDAQ: JASO) traded at $0.95 and has a market value of around $192 million. The consensus target price from Thomson Reuters is $1.85 and the 52-week range is $0.89-$6.15. Three months ago the target price was $2.25. JA Solar does not pay a dividend. The implied upside to the consensus target is 95%, and we note again that the target is far below the 52-week high.

ReneSola Ltd. (NYSE: SOL) traded at $1.35 and has a market value of around $116 million. The consensus target price from Thomson Reuters is $1.98 and the 52-week range is $1.32-$7.65. Three months ago the target price is not available. ReneSola does not pay a dividend. The implied upside to the consensus target is 47%, and we note again that the target is far below the 52-week high.

The only dividend-paying company out of this group is Applied Materials — that fact alone makes it a better bet than any of the rest. The company thinks it will grow sales 16% in 2012, but that will probably include another decline in sales of solar cell-making equipment. Revenue from Applied’s solar business fell -62% in 2011, and there is simply no prospect of a turnaround of any size in the solar business this year. Applied’s potential upside of 30% is not unrealistic from a mathematical point of view, but from a practical point of view that upside is probably too high by at least half.

Of the panel makers, the best any can hope for is that the situation doesn’t get any worse. We noted yesterday that Maxim Group raised its rating on Trina Solar from ‘sell’ to ‘hold’. That’s known as “damning with faint praise.”

And based on the quarterly earnings reports we’ve seen so far, ReneSola offered the most hope, saying that it plans to reach a cost of $0.70/watt in the second quarter, which might bring its margins back out of negative territory. The operative word is ‘might’.

The apparent value in the solar sector represents a gamble more than anything else. The industry is too different now from what it was two years ago to make any sort of historical argument for one company over another. But one thing is certain — solar is no longer a growth sector, it is a contracting sector. What looks like a value investment today is really a survival bet.

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Paul Ausick

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