SunPower Clouds Outlook for Solar (SPWRA, TOT, FSLR, STP)

After markets closed yesterday, solar PV maker SunPower Corp. (NASDAQ: SPWRA) released a preliminary report for its second quarter and the news was not pretty. SunPower has been a high-flyer in the solar sector since late April, when French oil giant Total SA (NYSE: TOT) announced that it would purchase 60% of SunPower shares. The company’s shares are about to come back to earth and the thud it makes will reverberate throughout the industry.

Despite SunPower’s best efforts to make the announcement sound like a mixed report, the details are all negative. The company expects revenue of $590-$595 million, compared with an earlier outlook of $550-$600 million. Analysts were expecting $572 million, so that might in fact be a tiny bit of good news.

The bad new is that gross margins will be much lower. Previously the company had forecast non-GAAP margins of 15%-17%. It has lowered that to 12%-13%. On a non-GAAP basis, EPS, previously forecast at -$0.05-$0.10, is now expected to come in at a loss of around -$0.19. On a GAAP basis, margins are expected to be 3%-4% and the loss per share is expected to be about -$1.50.

SunPower is blaming market conditions in Germany and Italy, historically the two largest buyers of solar PV panels, which have reduced subsidies and throttled new installations. The company reports earnings officially on August 9th.

Before the offer from Total, SunPower shares had been trading around $16. The $23.25/share offer price sent the stock up more than 40%. And the price has remained elevated, closing yesterday at $20.88. SunPower may have seen the last of a $20+ share price for a while.

The company’s problem has been that it is a higher-cost producer due to its more efficient solar panels. The question has always been whether or not the company could make the pricing adjustment that was needed once Germany and Italy pulled back on solar subsidies. The verdict is now in.

The damage is spreading too. First Solar Inc. (NASDAQ: FSLR) which reports earnings later today has this morning been downgraded from ‘buy’ to ‘hold’ by one analyst firm. Although the downgrade is due to many factors, the primary problem is margins.

First Solar’s gross margins were above 50% in the first quarter, but net margins of about 20% were lower than the semiconductor industry average. First Solar’s thin-film process is the solar PV industry’s low-cost leader, but the silicon-based makers like Suntech Power Holdings Co. Ltd. (NYSE: STP) are catching up. Suntech and other Chinese solar makers are expanding their manufacturing capacities even as prices and margins fall, banking on establishing a market share lead that will carry them through the current period of lowered subsidies.

SunPower has been unable to keep up the constant pace of lower pricing, and nothing in last night’s announcement indicates that the company has a plan for increasing its competitiveness. SunPower’s shares closed at $20.88 yesterday, in a 52-week range of $9.61-$23.36. The shares are off about -4%, at $20.05, following after-hours trading last night.

First Solar could be coasting along on is cost leadership, but that won’t carry it much further. The company needs to figure out a way to curry favor with investors, and because of its very low long-term debt, may decide to borrow some money to fund a share repurchase. A dividend is also possible, but unlikely.

First Solar did get some encouragement yesterday when Auriga initiated coverage on the company with a ‘buy’ rating and a price target of $157/share. First Solar’s shares closed at $124.12 yesterday, in a range of $111.40-$175.45.

Paul Ausick