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The past week has been a head-scratcher in the solar industry. Efficiency leader SunPower (Nasdaq: SPWR ) announced layoffs and the temporary closure of some production lines; industry laggard LDK Solar (NYSE: LDK ) received an infusion from a Chinese investor; and earnings reports suggest it may be another rough quarter for solar companies.
What does this mean for solar stocks? Here's my take on these three developments.
What's going on in China?
U.S. markets are being crushed today, and U.S. companies First Solar (Nasdaq: FSLR ) and SunPower are falling more than 2% along with the market. But most Chinese solar stocks are up as of this writing. What in the world is going on?
Chinese stocks in general are rising on hope that China's new leadership will continue to stimulate the economy. The solar industry is beginning to benefit from large installations in China, and investors are betting that the industry will continue to grow.
We're also starting to see some action by companies to shore up their balance sheets -- sort of. LDK Solar said it was selling a 19.9% stake in its company to Heng Rui Xin Energy for $23 million and has gotten a big boost as a result. Companies like LDK Solar, Suntech Power (NYSE: STP ) , and Yingli Green Energy (NYSE: YGE ) have more than $1 billion of net debt, and they need to find ways to pay off this debt. Equity sales are one way to do that. LDK also recently had some of its debt paid off by the local government of Xinyu, where the company is based.
More funding and less debt is good, right? Maybe it would be if LDK Solar had a manageable debt load, but I doubt a $23 million investment will impact $3.27 billion of net debt. After all, it is only 0.7% of that total, and the company is far from profitable. It's also important to note that the funding comes from a company that's 40% owned by a state-owned company when debt is coming from state-owned banks.
Companies like Trina Solar (NYSE: TSL ) and Suntech have started to acknowledge the long-term challenges by restructuring their businesses, which should be seen as a positive for the industry. But bailouts for LDK or other low-tier producers are only going to hold up weak solar companies in the short term and delay the industry's consolidation. Whether you're looking at a Chinese manufacturer or a U.S. manufacturer, unsustainable companies (like LDK) staying in business for longer than necessary is not a good thing.
SunPower has been driven significantly lower over the past week after announcing the elimination of 900 jobs and the idling of half of its cell manufacturing lines in Fab 2 and a 20% reduction in panel manufacturing. It's no surprise that the market has punished the stock as a result.
In this case, it's important to note that the company didn't change its 2012 guidance, and said it remains on pace to reach cost per watt of $0.75 on an efficiency-adjusted basis by the end of the year.
So, what is going on with SunPower? My take is that the company is making a major effort to reduce inventory and keep a strong balance sheet as the solar industry shakes out. SunPower has been forced to take big writedowns on inventory in the past as prices plunged, and this will reduce that risk. This doesn't mean that layoffs or reducing production is a good thing, but it may be prudent given the current environment. First Solar has made similar moves in recent quarters.
Maintaining current guidance is also important because it gives an initial indication that sales aren't going to be greatly affected this year. I am concerned about this going forward and will be listening keenly on the earnings call to get an indication of the trajectory of SunPower's sales.
I'm a shareholder, and I've gone from looking to add to my SunPower stake to taking a wait-and-see approach. I don't think any solar stocks are going to pop in the next quarter or two, so if you're waiting on the sidelines I would stay there until more supply leaves the market and winners begin to emerge.
This morning, DuPont said that PV sales were weak, and the company's earnings were hit as a result. 3M (NYSE: MMM ) also said that renewable energy sales declined year over year. Both of these companies are suppliers to the solar market, so we can't conclude that every solar company's results will be weak, but it is an early warning sign that it may be a long earnings season.
Foolish bottom line
Reports of layoffs from SunPower and weak earnings reports are a negative for the industry as a whole, and investors should use caution going forward. I also don't see LDK's infusion as a good sign for an industry desperate for consolidation.
I'm still bullish very long-term about the solar industry, but picking winning stocks will be tough, and it may take longer than investors hope to determine who will emerge a winner.
One company that still has as good a shot as any is First Solar. If you're looking for our recommendation on how to play First Solar along with continuing updates and guidance on the company whenever news breaks, we've created a brand new report that details every must-know side of this stock. To get started, just click here now.