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Solar Preview for the Second Half of 2012

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Solar stocks have tumbled in the first half of 2012, continuing massive declines that occurred in 2011. But we're into the second half of the year, which could bring some hope.

Markets like Japan, China, and the U.S. are expected to pick up in the second half as installers adjust to new feed-in tariff rates and recover from subsidy cuts in the U.S. in 2012. Companies are also adjusting to new tariffs in the U.S., which has held a cloud over Chinese solar manufacturers. Here's how I see all of this affecting solar companies in the second half of the year.

More differentiated products
Efficiency will be a major differentiator in the second half of the year that will easily make up the pennies in cost difference between modules. SunPower has the efficiency lead over its public competitors by a wide margin, but Chinese manufacturers will battle it out for second place. Canadian Solar is making strong advancements, and so are Trina Solar, Yingli Green Energy, and Suntech Power. Those who can't innovate or invest in new equipment will be left in the dust.

New products that lower balance of system costs will also become popular in the second half of the year. Canadian Solar and Trina in particular are starting to introduce products that will lower balance of system costs with inverters built in or standard mounting structures. This will help these companies differentiate themselves from the competition.

Divergence of the haves and have-nots
We've reached the point in the industry's development that speculating on technology is almost worthless. Thin-film is slowly dying, and the industry will be dominated by crystalline silicon for the foreseeable future. Costs for crystalline silicon modules have fallen below $1 per watt and only a few pennies separate most manufacturers' costs per watt at this point. What this means is that a small difference will separate strong manufacturers from the weak ones, who will continue to take share.

Balance sheets will be the first differentiator between haves and have-nots. Customers are going to want to buy modules from companies that will be able to live up to warranty and service agreements, so those with heavy debt loads will be scrutinized. We've already seen the likes of LDK Solar (NYSE: LDK  ) and Renesola (NYSE: SOL  ) suffer from their balance sheets as well as inferior products, and I expect this to continue.

Those with differentiated products, like I pointed out above, will also begin to separate themselves. There isn't a huge difference between a module made by Trina Solar and Suntech Power, but if Trina's module is easier to install and they have a better balance sheet, the choice becomes easy.

I think LDK Solar, Renesola, Hanwha SolarOne, and maybe JA Solar (Nasdaq: JASO  ) head up the list of have-nots in the second half as their results will continue to struggle. SunPower, Trina Solar, and Canadian Solar are my top picks to emerge in the "have" category.

Squeaking out a profit
Up to now the only solar manufacturer making a profit has been First Solar (Nasdaq: FSLR  ) and even it has reported losses recently. On the inverter side Power-One (Nasdaq: PWER  ) is making money, but even its profits have fallen in recent quarters.

But the second half of the year, one solar company may swing to a profit and change the game for the industry. SunPower is expected to report a penny per share profit in the third quarter and $0.08 in the fourth quarter. Plus, the company has beaten expectations the last three quarters, so there is a chance earnings will be even better than that.

This would be key for a couple of reasons. It would demonstrate the industry's shift from low-cost products to high-efficiency products since SunPower is actually one of the higher cost manufacturers on a per watt basis. It would also be the first company to show it can make a profit in this low cost environment, and I think it would kick-start the industry's profitable growth for those who emerge from the current funk.

Stock predictions
Predicting where solar stocks are going to go is a dangerous thing to do these days, but I'll jump out on the limb. I think that three companies will end the year higher than they are right now: SunPower, First Solar, and Power-One. The latter two I've picked not because I like their strategic positions, but because I like their value. SunPower is the one that I think will turn to a profit and should pace the industry over the next 12 months or more.

The companies that will continue to fall behind the curve are LDK Solar, Renesola, and Hanwha SolarOne. They aren't making money, don't have differentiated products, and have terrible balance sheets. That spells disaster in the solar industry.

For another energy stock that should do well this year check out our analysts top energy pick. It's revealed in a free report found here.

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

The Motley Fool owns shares of Power-One. The Motley Fool has a disclosure policy. We Fools may not 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.

Read/Post Comments (5) | 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 July 13, 2012, at 7:05 PM, solardog wrote:

    In my humble opinion Renasola should outperform these 3 picks. It has the lowest cost structure per watt and will continue to attract more business and sales due to this simple fact. The company just raised it's shipment outlook for 2012 up to 2.2 - 2.4 GW. It has proprietary cell technology, a "differentiating product" - ie: Its inexpensive virtus panels are 18.2% efficient, top effiency for low prices. Grid parity in China. China is betting big on solar farms as energy is in big demand and they dont have all our cheap nat gas underground! Germany continues to lead the world in solar installations, but China will catch up given the time.

    I agree with the author that LDK has a terrible balance sheet after Q2 results.

    Renasola will be a huge dominant player in the solar manufacturing world by 2014 as it continues to grow. Renasola makes its own polysilicon 8n chunk.

  • Report this Comment On July 17, 2012, at 11:23 AM, TMFFlushDraw wrote:

    The Virtus product is 18.2% efficient at the cell, not the module. This is maybe at the high end, but comparable to every other manufacturer, not differentiated.

    Also, cost structure means little these days, like I said differentiation of product is key. SunPower has higher margins than Chinese manufacturers and has the highest cost structure of the group, showing that once costs reach a certain level they matter less and less.

    Travis Hoium

  • Report this Comment On July 17, 2012, at 6:43 PM, solardog wrote:

    Thanks! I stand corrected panel vs cell efficiency.

    07/17/12 SunPower is very efficient, but Sanyo HIT is slightly superior. Sanyo and SunPower manufacture panels IN the USA to avoid the (coming) tariff from the US DOC. The new tariff will make most USA home owners pay more for thier rooftop systems, and should even boost German SolarWorld AG bottom line! go figure. I predict the Chinese will figure out a way to raise margins eventually. Get them all in one room.

    California energy commission:

    Regardless, I'm not sure a slightly smaller footprint is critical to most new installations. Low cost is. Greece's BigSolar just selected 100MW of Renasola panels, not SunPower or Sanyo.

    ** FYI only **

    In theory this new panel has "differentiation", but once again the cost is a huge factor. IF they can figure out how to make these cheaply then we may have a game breaker. But many schools and R&D shops have had these breakthroughs over the years, only to fizzle out due to high cost. The solar "lens" was one such idea that was too costly.

    North Carolina’s Semprius Inc. and its German backer Siemens said they have developed the world’s most efficient solar panel.

    The prototype converts 33.9 percent of the sunlight that hits it into electricity, according to separate press releases from the two companies. That’s more than double the most efficient conventional photovoltaic (PV) module on the market.

    Semprius late last year announced a breakthrough in the 41 percent efficient solar cells it builds into its modules. Cells typically are more efficient than the overall module.

    Very interesting stuff, I would love to try these!

  • Report this Comment On July 31, 2012, at 1:36 PM, solardave wrote:

    I believe that if a company can differentiate itself even by 1% greater module efficiency at the same price to the market or even less because it costs it less to manufacture due to material cost advantage or process efficeincies, then it will succeed. That 1% greater power production can move the ROI on large projects. SPR is trying to reduce it's cost to produce and touts which manufacturers will survive long term in the future based on cost to manufacture, not margin at this time.

  • Report this Comment On August 15, 2012, at 12:00 AM, joepennies wrote:

    I truly believe the solar industry will be one of the hottest sectors in the near future. Warren Buffett is pouring money into utility scale solar farms. Google has invested heavily. Government money is pouring in. Huge solar farms are even being planned on military bases. I recently wrote two articles about solar stocks and where I think this is headed:


    I plan to write more in the near future. All I can say for now is buy solar!

    Joe Wolfe

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