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.
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.
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