Are Solar Stocks Due for Another Fall?

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From an investor's standpoint, maybe the best thing about an industry like solar is also the worst thing: It's young and rapidly changing. While this means that big returns can be had over the long haul if you pick up the right names at reasonable prices, it also means that investors are bound to suffer the industry's growing pains as the winners get sorted from the losers, and companies learn how to manage downturns the hard way. The latter problem reared its ugly head during the first brutal months of the recession, and I think it's due to return during the second half of this year.

Earnings look good
At first glance, this might seem a strange time to get nervous about the outlook for solar stocks -- even if only for the near term. The latest round of earnings reports delivered by solar cell and module manufacturers were far from terrible. Thin-film module giant First Solar (Nasdaq: FSLR  ) knocked the cover off the ball, delivering stellar first-quarter results and providing 2010 earnings guidance well above Wall Street forecasts. Chinese manufacturers JA Solar (Nasdaq: JASO  ) and LDK Solar (NYSE: LDK  ) also provided earnings and guidance that blew away market expectations, and Suntech Power (NYSE: STP  ) pre-announced first-quarter numbers that did the same. Among big solar names, only SunPower's (Nasdaq: SPWRA  ) numbers proved disappointing.

And not only has demand picked up for the industry, pricing is finally stabilizing after being in a free fall for much of the recession. That's a mixed blessing for cell and module manufacturers, because it has also translated into stronger prices for the silicon wafers made by the likes of MEMC (NYSE: WFR  ) , which make up their largest component cost. But it's still a clear sign that business has finally stabilized.

Overcapacity and euro woes
So why the concern about the industry hitting another rough patch? Well, it has a lot to do with the industry's newfound optimism about a recovery leading it to move too fast, too soon. The earnings calls of cell and module manufacturers were littered with announcements about plans to grow capacity to meet rising demand. First Solar raised its 2010 capital spending forecast from a range of $500 million to $550 million to one of $625 million to $650 million. LDK Solar stated that it now expects to more than double its module manufacturing capacity by the end of the year. And JA Solar boosted its 2010 capital spending guidance from $130 million to a range of $220 million to $250 million.

All of this might be good news for Applied Materials (Nasdaq: AMAT  ) , whose solar manufacturing equipment business could use a boost, but it once again raises the specter of a major capacity glut, leading to crashing prices and dwindling gross margins. It sure doesn't help that all of this expansion comes at a time when the industry is bracing for a major cut in German solar subsidies. Or that solar manufacturers are still very dependent on demand from Europe in general. As we know, that continent is looking pretty shaky economically, and the combination of a credit crunch, government spending cuts, and a plunging euro (which makes imports more expensive for Europeans) could especially hurt an industry like solar.

The semiconductor industry went through some ugly boom-bust cycles in its early days on account of manufacturers getting carried away while times were good. It looks like the solar industry isn't finished learning its own lessons about how to manage industry cycles, and that spells trouble for solar stocks during the second half of 2010.

Fool contributor Eric Jhonsa doesn't own a position in any of the companies mentioned. First Solar and Suntech Power Holdings are Motley Fool Rule Breakers recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (8)

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  • Report this Comment On May 21, 2010, at 7:02 PM, Fairhopeguy wrote:

    another article written by someone who only cuts and paste the past articles about solar stocks.

    Are these Clowns at the or the other useless rags ever going to report an article that tells about the differences between companies in a sector and stop lumping them all together..

    Case in Point. First Solar gets 80% of revenues from Europe, therefore, they have to hedge those revenues or face serious currency conversion issues during this qtr. J A Solar get's 80% of it's revenues from outside of Europe, therefore, they only have to hedge 20% of revenues, which they reported during their most recent conference call that they have already done. This means that J A Solar will face little to no currency conversion issues during this Qtr or any subsequent Qtrs.

    Why is it that no one will report about the superior advantage one company has over others in a sector? Is it because they haven't done enough homework to know about these differences, or is it because they are to lazy to do the work.

    J A Solar is so undervalued at the moment it's amazing. A $5.00 stock, with a P.E. of around 7 which should do at least a dollar in earnings for all of 2010. If we assign a forward P.E. of just 10 to the stock it's trading at least half of what it's worth.. A p.e. Of 20 for a company growing at over 30% and, well, you get the picture...

    J A Solar is the cheapest Chinese solar company on the planet, but don't take my word for it, run the numbers yourself, and remember 80% of their business is outside of Europe with 65% coming from China alone..

    To bad no one with any clout has done thier homework and has the stones to report this..

  • Report this Comment On May 21, 2010, at 7:32 PM, CMFStan8331 wrote:

    I agree that solar is a fairly risky industry at this point. Another factor to consider is that it can be very difficult to predict the eventual winners in a young industry. Having an early lead is no guarantee of success when things are still being sorted out and revolutionary changes are coming along at a rapid clip. Think about how many pre-tech bubble high-flyers no longer exist. Until we get a ways further down the road, there's really no reliable way to predict who the Googles and Amazons of the solar industry will turn out to be...

  • Report this Comment On May 21, 2010, at 8:28 PM, Fairhopeguy wrote:

    It will be the companies that have a certain advantage over the others at just the opportune time..

    When one company stumbles the one that doesn't will make the biggest leap forward..

    Right now, J A Solar has the advantage of no short term debt, minimal long term debt, a three qtr backlog of orders and little to no Euro exposure..

    In the next few qtrs when the euro exposure kicks these other companies J A Solar is going to fly right by..

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