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A Foolish Reaction: Solar Tariffs

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This week, the U.S. Department of Commerce announced a preliminary verdict on unfair Chinese subsidies for solar companies. As many suspected, a tariff will be put in place on Chinese solar imports. What analysts didn't expect was a relatively low tariff of 2.9% to 4.73% for manufacturers.

This news sent solar stocks into a frenzy on Tuesday. Yingli Green Energy (NYSE: YGE  ) and Trina Solar (NYSE: TSL  ) jumped because the ruling was viewed as a win for Chinese manufacturers, while SunPower and First Solar (Nasdaq: FSLR  ) have plunged on the same view.

But how is this new tariff really going to affect solar companies?

This isn't over
It's important to remember that this was only one part of the ruling against Chinese companies. There's also a dumping charge, and history has shown that this part of the tariff is often larger than the subsidy tariff. May 16 is the day we're scheduled to get a ruling on this, and then the International Trade Commission will need to complete its investigation.

The bottom line is, this is only the beginning of the tariff story in the solar industry, and future rulings will probably add more tariffs to Chinese products.

The impact will be minimal
A leading solar follower, Greentech Media, analyzed the potential impact of a solar tariff and determined, "It just doesn't matter." Solar manufacturers are already starting to move manufacturing to more local sites, including Mexico and the United States, or to low-cost countries such as Malaysia, India, or South Korea, where they can get around the tariff.

The site reports that you can already get quotes for trade-compliant modules to be delivered as early as the second quarter of this year.

There are simply too many ways around the tariff to make much of an impact, except unintended ones like moving manufacturing to Mexico.

The alternative is to kill solar
Analysts and investors may be surprised that the announced tariff wasn't higher, but I'm happy it wasn't. A higher tariff could have been disastrous for the entire solar industry, forcing a growing industry to cope with higher costs and less competition among solar manufacturers. The main factor that has driven the explosion in solar in the U.S. is dramatically lower costs, and if the Department of Commerce would have instituted anything near a 100% tariff as SolarWorld suggested, it may have stunted solar's growth.

Market trends are still in place
The stock market has obviously determined that the U.S. went soft on China and that this is bad for U.S. companies. But recent trends tell us that the opposite may be true.

Even before the new tariffs were announced, SunPower had the largest share of solar modules installed in California and had margins in line with the top Chinese companies. First Solar, despite its problems, still has the lowest costs and best gross margin in the business. These two companies would be the "winners" even with a small tariff.

Every penny that's added to the cost of a module from Suntech Power (NYSE: STP  ) , Trina Solar, or Yingli Green Energy makes them less competitive in the U.S. market. Razor-thin margins could evaporate, even for these top-tier suppliers. For lower-tier suppliers such as Renesola (NYSE: SOL  ) , Jinko Solar, and Hanwha SolarOne, which have negative gross margins, this tariff will only fuel more losses.

Maybe it's because I'm not in the business of predicting things like tariff rates and earnings per share that I don't see how the market's reaction makes sense. The market is reacting to a ruling with an eye on the short term, but this ruling only reinforces my long-term view of solar stocks. SunPower will benefit marginally from this ruling, and Chinese manufacturers will continue to bludgeon each other until the Chinese government is forced to let some of them fail.

I think the market has the reaction to this tariff all wrong. It won't kill Chinese solar companies, but it certainly doesn't help them. Then consider that there are probably more tariffs in the pipeline, and I see U.S. companies as the winners, even if the tariffs are small.

I think solar stocks have a chance to be multibaggers over the next decade, and our analysts have found another stock that fits the mold. Check out what stock that is in our free report, "Discover the Next Rule-Breaking Multibagger."

Fool contributor Travis Hoium owns shares of SunPower and manages an account that owns shares of 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. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (3)

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 March 23, 2012, at 1:56 PM, rudyi4 wrote:

    Travis it is understandable why you want to promote US solar companies as you have a financial stake in SunPower however Suntech already has a distribution point in Arizona and the Chinese still have a 25-30% price advantage so the minimal tariff of which will be apllied will do little to stop tier 1 PV companies from making further inroads to US markets. In addition solar cell efficiencies are improving rather quickly, Suntech announced a better than 20% solar cell efficiency recently with little downside risk regarding mfg scalability. The added efficiencies and huge labor advantages still far outweigh SunPower and First Solars ability to compete on a grander scale. In addition tier one players in China will be the biggest gainers within China and the consolidation of which is occurring there will further add to significant domestic use and any tarrifs of which have been applied are more likely to hurt US solar companies wanting to make inroads in the Chinese markets. Nice try though.

  • Report this Comment On March 25, 2012, at 9:46 PM, TMFFlushDraw wrote:

    If STP has such a strong advantage then why were gross margins similar to SPWR's in the most recent quarter? (~2% points different)

    The efficiency gap between STP and SPWR is where SPWR stands out and STP isn't anywhere near catching up to SPWR's efficiency. And how is STP different than 10 other Chinese manufacturers. Why them and not TSL, YGE, JASO, etc?

    There's also the balance sheet to consider. SPWR is backed by Total and has less than $1 billion in debt. STP has $1.6 billion in short-term debt and another $740 million in long-term debt.

    I do invest in the companies I think are best in the sectors I follow and that's why I own SPWR. If STP's strategic position changes I'll adjust my views.

    Travis Hoium

  • Report this Comment On August 15, 2012, at 2:19 AM, joepennies wrote:

    In my opinion, the best buys in solar are not any of the companies mentioned or any of the solar panel manufacturing companies. The best solar stocks are the ones with technology that will revolutionize the industry.

    Joe Wolfe

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