It's quite surprising the way investors are cheering up solar stocks even when companies are posting mountainous losses under the belief that the industry has found its bottom. The same happened with ReneSola (NYSE: SOL ) , which swung to a loss for the first time this year but saw its shares jump 7%.
Let's take a look at the company's credentials and examine how it may fare going ahead.
Dissecting the quarter
ReneSola saw its revenues cut almost in half from the year-ago period, to $189 million, as weak demand and a rapid decline in prices of solar products hurt its top line. This doesn't come as a surprise considering that every company in the industry has seen its margins battered because of falling prices and oversupply.
ReneSola had managed to keep its head above water in the second quarter due to its cost-efficiency, but this time there was no escaping as prices of solar products fell faster than the primary raw material, polysilicon. As a result, the company had to write down its inventories by almost $20 million, which pulled its gross margin into the negative.
The entire industry being in a mess throughout the year is nothing new. Chinese companies were laughing their way to the bank in the second quarter, but this time the likes of Yingli Green Energy (NYSE: YGE ) , JinkoSolar (NYSE: JKS ) , and others from the region find themselves in doldrums.
The disparity between demand and supply has led to accumulation of inventories in warehouses, and the European debt crisis has further compounded problems. The industry grew quickly last year, and most companies, especially Chinese ones, flooded the market with their panels. However, the solar spectrum is now in shakeout mode and looks to consolidate. Until and unless the economy looks up and demand-supply equivalence is restored, ReneSola may not get reprieve.
The dragon venture
China is the next hotspot for solar players, and ReneSola has finally begun to look in that direction. Overdependence on subsidy-driven markets in Europe has been the bane for ReneSola, and this particular move will in all probability reap benefits for the company in the long run.
Another reason behind this shift could be the impending tariffs on Chinese solar manufacturers after a group of U.S. companies filed an appeal accusing them of having an unfair price advantage due to subsidies received in China, whereby they sell their products at dirt-cheap prices.
The Foolish takeaway
I had said that ReneSola is one of the most cost-efficient companies in the industry, but its margins don't support the fact this time around due to macro factors affecting the entire industry. Contrary to investor belief of the industry hitting its bottom, I believe it would be better to wait and watch until the solar shakeout is complete.
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