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Solar's Devastating Quarter Starts Early

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All indications have pointed to a tough time for solar stocks in the second quarter. Germany lowered its feed-in tariff and is targeting a reduction in annual solar power installed. Italy's feed-in tariff was also in turmoil, which basically brought installations to a halt in the country. As a result, additional manufacturing capacity in the industry was fighting for a smaller pie than the industry expected. The results won't likely be pretty.

SunPower (Nasdaq: SPWRA  ) gave us a peek into the quarter when it announced preliminary second-quarter results yesterday, and the market wasn't at all pleased with what it saw.

What SunPower is seeing
Here are the big highlights from SunPower's release:

  • Revenue is expected to be between $590 million and $595 million, at the high end of previous expectations and well above analyst estimates of $572 million in revenue.
  • Non-GAAP gross margins should be between 12% and 13%, down from an expected range of 15%-17%.
  • Non-GAAP earnings per share are expected to be between a $0.19 loss and a $0.20 loss, down from prior guidance of between a $0.05 loss and a $0.10 profit. On a GAAP basis, the loss is expected to be between $1.50 and $1.55 per share.

Based on the higher revenue, lower margins, and comments about reducing inventory, it looks like management flushed as much product as possible through the system at reduced prices. That could be good news if you read carefully between the lines.

A closer look
In the explanation of the difference between GAAP and non-GAAP results, I saw a few points of interest that will impact SunPower positively going forward:

  • $29.3 million was dedicated to a "panel reallocation strategy," which means SunPower is moving panels to where demand is occurring.
  • There was a $32.5 million "writedown of third-party inventory and costs associated with the termination of third-party cell supply contracts." In other words, SunPower is taking a financial hit now to get lower-cost supply contracts in the future.
  • SunPower reduced inventory quarter over quarter, which will be something we'll have to watch from other panel manufacturers. Those who were aggressive in pricing likely gave up margin this quarter in return for lowering inventory.
  • The company also said it is ahead of schedule in its cost-reduction roadmap. After seeing disappointing gross margins and a larger than expected loss, I'll need to see more detail about what exactly this means, but for now I'll take that statement with a grain of salt.

Add all of this up and I see SunPower telling investors that they'll take a larger hit in the second quarter, which was expected to be weak for the industry, to gain some cost advantages in the future.

Suppliers will suffer most
If SunPower is any indication, wafer and cell suppliers could come under pressure this quarter. JA Solar (Nasdaq: JASO  ) , LDK Solar (NYSE: LDK  ) , and ReneSola (NYSE: SOL  ) supply these products to the industry and could be the first to be pinched as panel makers see lower sale prices.

Foolish bottom line
Keep a close eye on inventory levels as earnings come out of the solar industry this quarter. Companies with industry-leading margins like Trina Solar (NYSE: TSL  ) and Yingli Green Energy (NYSE: YGE  ) have the ability to lower panel prices to reduce inventory while still generating a profit. What will be interesting to see is if mid-level suppliers like JA Solar and Hanwha SolarOne (Nasdaq: HSOL  ) are forced to dump panels at low or maybe even negative gross margins to keep inventory from piling up.

It's going to be a rough quarter for solar manufacturers, and we may be starting to sort out the winners from the losers.

Keep up to date with what's happening in the solar industry by adding your favorite stock picks to the Fool's free stock tracking service, My Watchlist.

  • Add SunPower to My Watchlist.
  • Add JA Solar to My Watchlist.
  • Add LDK Solar to My Watchlist.
  • Add ReneSola to My Watchlist.
  • Add Trina Solar to My Watchlist.
  • Add Yingli Green Energy to My Watchlist.
  • Add Hanwha SolarOne to My Watchlist.

Fool contributor Travis Hoium owns shares of LDK Solar and SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 26, 2011, at 11:38 PM, RickRickert4MVP wrote:

    I'm preparing for Yingli to have a blow out quarter. All signs are pointing to that. Things have never been greener on Middle Fuxing Road.

  • Report this Comment On July 27, 2011, at 12:46 AM, money7524 wrote:

    you forgot to mention that

    1. GCL-Poly Energy Holdings (3800) sees net profits surging 300 times in the first half [2011/H1] compared to last year [2010/H1] thanks to a sharp increase in sales of polysilicon.

    2. Australia is on steriod!

  • Report this Comment On July 27, 2011, at 1:33 PM, dogmatica wrote:

    Aloha Travis!

    Germany lowered their FIT? When, and by how much? I could'v e sworn that they waited for install figures from March to May to decide this issue, and when these figures came in very low, 700 and something MWs, that they kept their FIT intact for the rest of 2011. When did I miss this HUGE news? I think you totally blew it on this one, and it's a major error on your part.


  • Report this Comment On July 27, 2011, at 1:39 PM, dogmatica wrote:

    Aloha again!

    Yes, Travis, you've blown it Big Time!

    From Bloomberg, June 16:

    "The German govt scrapped plans to reduce their subsidized power prices paid for photovoltaic energy in July because new installations fell short of the level needed to trigger a cut."

    What, dear Travis, are you talking about?


  • Report this Comment On July 27, 2011, at 2:26 PM, mrhmotley wrote:

    I will keep this respectful:

    What a load of rubbish! Germany is on a tear, Italy is on a tear, so is the US, Japan and that#s to say nothing for China.

    You do a great disservice to Motley Fool and their members when you write this sort of thing to completely mislead its readers.

    Why don't you try following Solar on Google news, or sign up for some of the solar industry news alerts - there are dozens. You might learn something. By the way, the German Govt has signed into law plans to have 85% of electricity from renewable sources by 2050. Try doing some research next time. There you go - totally respectful!

  • Report this Comment On July 28, 2011, at 12:19 AM, sailrick wrote:

    "Germany passes new renewable energy law for 2012, raises targets and payments"

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