Solar Cell Suppliers Are Falling Behind

We've heard from the best. Now it's time to hear from the rest of the solar manufacturers. I'm cringing already.

The numbers are in
JA Solar
(Nasdaq: JASO  ) reported revenue of $413.0 million, a decrease of 26.7% sequentially, as demand for solar products waned. As previously announced, gross margins fell into negative territory at 2.7%, and a net loss of $35.4 million, or $0.22 per share, was the result.

Part of the issue was a fast drop in module and cell prices at the beginning of the quarter and a lagging drop of poly and wafer prices. This put margin pressure on JA Solar, some of which is reversing itself in the third quarter, so investors can at least hope that this will be the bottom.

Management does see demand picking up in the third quarter, as certainty has returned in Germany and Italy. And the United States is also expected to grow into a major market, with as much as 2.5 GW of installations in 2011. 

It gets worse
LDK Solar
(NYSE: LDK  ) was the big loser of the week after announcing a drastic drop in guidance this morning. I've heard of guidance being off, but LDK really dropped the ball this quarter. Here's how expectations have changed:

Metric Previous Guidance Current Guidance
Revenue $710 million-$760 million $480 million-$500 million
Wafer shipments 500 MW-550 MW 410 MW-430 MW
Module shipments 200 MW-220 MW 75 MW-80 MW
Gross margins 22%-26% 1.5%-2.5%

Despite high expectations for revenue and margins, LDK isn't going to be anywhere near where it originally thought. We'll know all of the details when earnings are officially released on Aug. 29. 

Stick to quality
I've been telling investors to stick with only the highest-quality names in solar, and this quarter demonstrates why. First Solar (Nasdaq: FSLR  ) and SunPower (Nasdaq: SPWRA  ) didn't have blowout quarters, but they weren't put in as tough of a position as JA Solar and LDK Solar were.

I've also said that vertically integrated companies will provide more shelter than suppliers, who are the first to be squeezed. JA Solar and LDK Solar showed just how bad it can get for suppliers in the solar sector. In China, Trina Solar (NYSE: TSL  ) and Yingli Green Energy (NYSE: YGE  ) provide more stability than either JA Solar or LDK solar because of their vertical integration and strong position in module sales.

Speaking of Yingli Green Energy, check back on Monday for my take on the company's recently announced earnings. Here's a preview: It's one of the few impressive reports to come out of the solar sector recently.

And be sure to add you favorite solar stock to My Watchlist, and My Watchlist will find all of our Foolish analysis on the stock.

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

Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (1)

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 August 19, 2011, at 11:17 PM, pinhead212 wrote:

    Like far too many articles posted on the web, this writer should really check facts before posting. Sticking with the "highest-quality" name of First Solar would see your stock price fall from $163 on April 1, 2011 to $88 today. So nice to know the writer wasn't fulfilling a preset agenda with the publishing of this story. Can I get my own set of pom-poms since I mentioned First Solar?

  • Report this Comment On August 21, 2011, at 5:19 PM, TMFFlushDraw wrote:

    What facts are you referring to? FSLR has the best margins in the industry, by far. How is that not high quality?

    Travis Hoium

  • Report this Comment On August 21, 2011, at 5:29 PM, TheDumbMoney wrote:

    pinhead212: if I had a dollar for every time some pinhead commenter on this site linked stock performance to quality withough discussing fundamentals of the business, I'd be a gajillionaire.

    TMFFlushDraw: Would love to see more articles on the macro-picture for the solar. I have had my eye on FSLR for a long, long, long time, but have never pulled the trigger because the whole industry seems so government-dependent, and while I have inherent ideological objection, that just has not at any time seemed sustainable to me, given the economies of major Western countries. I think we may finall be seeing the long-awaited shakeout in the industry, where many companies go bankrupt or get bought, and the survivors drop to a level from which subsequent gains can be sustainable for long-term holders. I'm not sure we're there yet, but then again, I'm not sure of anything. FSLR at $88 is looking pretty good to me, and I just wonder how much lower it will go.

  • Report this Comment On August 21, 2011, at 5:30 PM, TheDumbMoney wrote:

    ..."while I have no inherent ideological objection"...

  • Report this Comment On August 21, 2011, at 10:35 PM, TMFFlushDraw wrote:

    @dumberthanafool

    I think your concerns are very valid. Government support is still important to drive demand but over the next few years that support will decrease and the industry will be able to stand on its own. In the mean time, the shakeout will continue, which is good for the long run.

    Here's a quick look I did at how much solar power costs that might help.

    http://www.fool.com/investing/general/2011/06/27/how-expensi...

    Solar is about $0.18-$0.20 per kWh right now, competitive with new peak generation (without mentioning the issues solar power presents). As that falls solar will only become more attractive to utilities and homeowners.

    With that dynamic in mind I think that the industry will head for a large demand increase once costs reach the threshold of "grid parity". I believe that is happening before our eyes and investors in for the long haul will be rewarded.

    Is this the bottom? I have no idea and timing the market is impossible.

    Do I think solar companies will be better, more profitable, and continue to grow over the next 5-10 years. Yes. And that's why I'm investing in solar. (not very profitably yet but I'm hanging in)

    I'll try to get some macro info out in the next week or two as earnings wind down.

    Hope that helps,

    Travis

  • Report this Comment On August 22, 2011, at 12:35 AM, AvianFlu wrote:

    I've owned First Solar and Sunpower for years in a minor position so I can stayed tuned to their story more easily. It's been disappointing.

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