Solar manufacturers have reported their earnings for the third quarter, and like most people expected, the results weren't pretty. Falling prices for modules and polysilicon hurt different manufacturers in different ways, but the commonality is that everyone was squeezed this quarter.
What's interesting is that we saw some separation between top-tier manufacturers and lower-tier manufacturers. I pointed to this gap when I wrote earlier this month that solar would have many more failures before the industry shakeout is complete, and the gap is obvious when you look at financial results.
So where do manufacturers stand right now? I've made the table below to show just how solar manufacturers stack up compared to each other. I've ordered the companies by relative financial strength. Please note that revenue growth at First Solar (Nasdaq: FSLR) and SunPower is not necessarily comparable to other manufacturers because they have project sales included this quarter. I've also kept inventory writedowns at manufacturers in their margins and net income.
|
Company |
Sequential Revenue Growth |
Gross Margin |
Net Income |
|---|---|---|---|
| First Solar | 112.7% | 37.7% | $196.5 million |
| SunPower | 19.1% | 10.8% | ($21.0 million) |
| Trina Solar (NYSE: TSL) | (16.8%) | 10.8% | ($31.5 million) |
| Yingli Green Energy (NYSE: YGE) | (3.2%) | 10.8% | ($28.3 million) |
| Suntech Power (NYSE: STP) | (2.5%) | 13.3% | ($116.4 million) |
| Canadian Solar | 3.7% | 2.4% | ($43.9 million) |
| JA Solar (Nasdaq: JASO) | (7.3%) | (4.3%) | ($59.0 million) |
| ReneSola (NYSE: SOL) | (24.1%) | (4.0%) | ($8.2 million) |
| LDK Solar (NYSE: LDK) | (5.5%) | (3.6%) | ($77.1 million) |
Source: Company filings. Note: SunPower's net income does not include a $349.8 million goodwill and intangible assets writedown.
As you can see, manufacturers will have to operate with more than a 10% margin long-term to turn a profit. Only First Solar was able to squeeze out a profit, but even that hasn't been enough for the market in recent months.
Due to the rapidly falling price of solar products, nearly every manufacturer wrote down a portion of their inventory. These charges should slow in coming quarters and could boost margins at some manufacturers, but the charges this quarter indicate just how fast prices fell.
Balance sheets become an anchor
If the Chinese solar manufacturers were based in the U.S., most of them would never have gotten the bank loans that have helped them build their businesses. Short-term debt of $2.4 billion at LDK Solar and $1.6 billion at Suntech Power just wouldn't exist.
So the future of these companies relies partly on how state-run banks handle this debt and worsening finances. I might predict that some of these companies will soon go bankrupt because they have negative margins, falling sales, and loads of short-term debt, but we don't know exactly how China is going to handle their finances.
No matter what China does, I wouldn't want to bet on most of these companies considering their worsening financials.
Only quality will survive
If you were installing solar modules today, why wouldn't you choose the highest quality option you can? Manufacturers like SunPower and First Solar are both lowering prices, and customers are responding with a flight to quality.
That's bad news for the companies at the bottom of the above table; their only competitive advantage at this point is lower prices. But when you're talking about lowering an overall system's cost $0.05-$0.10, or 1%-2%, why take the risk?
Foolish bottom line
The only company I see as a real buying opportunity right now is SunPower, which has an efficiency lead on the competition, a project pipeline, and new products hitting the market that should lower levelized cost of energy. Chinese stocks are far too risky, and even though I own shares, I'm not crazy about First Solar's competitive position with low-efficiency modules.
What company do you think is the best buy in solar? Leave your thoughts in the comments section below.
