Recent developments surrounding the U.S. Environmental Protection Agency's carbon emissions restrictions are likely to steer more investors toward alternative energy sources, including solar power. Some solar panel manufacturers such as SunPower (SPWR -1.48%) and First Solar (FSLR -1.18%) have benefited from the robust demand for solar, and their shares have rallied in recent months. But will these companies translate their growth in sales to higher earnings?

The rising sun
The Energy Information Administration expects solar power consumption to spike in two years by more than 57% to reach 0.482 quadrillion Btu by 2015. This year alone, the EIA projects consumption will grow by 33%, year over year. But does this translate to higher sales?

On a market scale, the Solar Energy Industries Association reported a 79% jump in solar photovoltaic (PV) installed in the U.S, year over year. This rise in demand also drove higher SunPower's and First Solar's revenues higher by 9% and 26%, respectively, during the first quarter. Therefore, the stronger demand for solar power corresponds with higher revenues for leading solar power manufacturers.

Moreover, these companies were able to improve their profit margins in the past several quarters: SunPower's operating profitability reached 10% in the first quarter. Back in the same quarter of 2013, the company had an operating loss. First Solar also widened its profit margin by nearly 3 percentage points to 11.8%. They also made great strides in cutting down manufacturing costs, which will positively impact their profitability.

On a yearly scale, SunPower projects its gross margin will rise slightly to a range of 20%-22% compared to last year's 19.6% margin. Conversely, according to its current annual guidance for 2014, First Solar expects a drop in its gross profit margin to 17.5% -- back in 2013 it was 26%.

These companies are likely to face challenges in the coming years: One factor to adversely impact their profit margins is the ongoing drop in the average price for residential and non-residential systems. During the first quarter, the Solar Energy Industries Association showed the average price in residential systems dropped by 7% to $4.56/W, quarter over quarter; prices in non-residential systems fell by 5.7%.

The falling prices could also adversely impact these companies' earnings per share, most notably First Solar. This year, First Solar expects its earnings per share to be between $2.20 and $2.60; back in 2013 EPS was $3.70.

On the other hand, SunPower expects its EPS to be between $0.75 and $1.05; in 2013, the company's EPS was only $0.70. The expected rise in SunPower's earnings per share will mostly be driven by strong demand in Asia Pacific including Japan, which accounts for 24% of its total shipments. Most of First Solar's revenue is from North America, where the growing competition and falling panel prices are slashing its profit margin. Therefore, First Energy's wide base in North America is likely to drive its EPS lower due to stronger competition, while SunPower, which has growing operations in Asia, could keep increasing its EPS.

In conclusion...
The growing demand for solar power is likely to keep driving up shares of leading solar panel manufacturers such as First Solar and SunPower. But these companies will also likely face stronger competition, which will keep suppressing prices and could curb their earnings growth. In the short term, however, growing revenue and falling manufacturing costs are likely to keep increasing SunPower's profit margin and earnings per share because of its strong positioning outside the U.S.