Are Solar Fundamentals Deteriorating?

The solar sector has had some bad news over the past week. Yingli Green Energy Hold Co (NYSE: YGE  )   and Trina Solar   (NYSE: TSL  )  both lowered their guidance for the upcoming quarter. 

Yingli Green Energy lowered its expected PV shipment guidance from a decline of mid twenties percent to a decline of low thirties percent, while Trina Solar lowered its shipped megawatt guidance from 670 MW-700 MW to 540 MW-570 MW. 

Both stocks are down significantly from their 52-week highs. Are the guidance warnings a sign of deteriorating solar fundamentals? 

Two solar warnings
Yingli Green Energy's reason for lower PV shipments -- that local construction project delays held up shipments -- seems like a one time event. The company expects permission for those delayed construction projects to be granted in subsequent quarters and to ship those delayed modules later in the year. Yingli Green Energy also expects to meet its previous 2014 yearly module shipment guidance of 4.0GW to 4.2GW.

On the surface, Trina Solar's reason for lower guidance -- that the deal to set a new minimum price for Chinese solar panels in the EU held up demand -- seems concerning. Europe comprised 31% of Trina Solar's 2013 revenue. If Europe forces Trina Solar to raise its prices to match the rest of the market, Trina's European demand may fall significantly.  

In practice, Europe's minimum import price regulations will not affect Trina Solar by much. With the exception of the first quarter of 2014, the company doesn't expect Europe's minimum import price regulations to reduce guidance for any subsequent quarters. The company, in fact, expects European demand to increase after the deal is in place. Like Yingli Green Energy, Trina Solar reiterated its previous full-year module shipment guidance. 

The bottom line
There are always hiccups to any recovery, and this solar recovery is no different. While the recent guidance revisions show that that solar demand is not as strong as many had hoped, the overall trend is still positive. Average selling prices have stabilized after years of falling. Gross margins are increasing. China still needs as much clean energy as it can get, as the country has a serious pollution problem, and China needs its solar companies to do well.

In my opinion, the sector sell-off has more to do with sentiment shifting rather than fundamentals changing.

Before the correction, solar stocks were the ultimate momentum stocks. Many stocks rallied by triple-digit percentages or more. When sentiment changed, many momentum investors left immediately, and solar stocks underwent a serious correction. 

Even though the momentum investors have left, the long-term fundamentals have not changed. Solar still has the potential to change the trillion-dollar electric utility industry. With solar panel production costs decreasing every year, solar energy is becoming more and more competitive. While most solar producers may be commodity producers who are susceptible to oversupply now, some winners will be strong electric utilities with moats in the future.

The recent news hasn't changed that long-term trend. 

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