For most of the past two years, the United States and Europe felt most of the pain in the solar industry. Companies from Evergreen Solar to Solyndra to Q.Cells went bankrupt trying to compete with low-cost Chinese manufacturers that had a flow of free money from government banks.
Recently, the trend has shifted, and Chinese solar companies are struggling, as factors other than cost become selling points for solar manufacturers. In today's environment, quality, efficiency, warranties, and balance sheets are just as important as cost alone. Combine that with protectionist moves in the U.S. and Europe and declining demand in markets such as Germany and Italy, and you have a rough year for Chinese companies. It's been evident in previous results, but the third quarter has only confirmed the trend.
Earnings continue to slide
LDK Solar (NASDAQOTH:LDKSY) reported earnings this week, and they were disappointing to say the least. Sales fell 38.2% from a year ago, gross margin was negative 11.2%, and the quarterly loss was $136.9 million. That's no way to stay in business when you already have $3.9 billion in debt and accounts payable.
The bigger news came on Friday morning from Suntech Power (NASDAQOTH:STPFQ), formerly the world's largest solar-panel supplier. The company reported preliminary results, which have been delayed because of an alleged fraud by one of its former partners.
In the third quarter, Suntech saw shipments decline 10% sequentially and revenue fall 18% to $387 million. The company's 5% gross margin was helped by a reversal of provisions for U.S. tariffs and without that continued a steady decline.
Trina Solar (NYSE:TSL), Canadian Solar (NASDAQ:CSIQ), Yingli Green Energy (NYSE:YGE), and now Suntech have all reported terrible numbers for the third quarter. There's simply no reason to buy into these stocks right now.
At this point, Chinese banks are going to have to decide which companies will survive and which ones won't. There are billions of dollars of loans to these manufacturers, and none is posting a profit, much less the ability to pay off loans. Long-term investors should avoid Chinese solar at all cost.
A solar IPO worth looking at
This week we should see the debut of SolarCity, the residential and commercial solar installer. The company plans to sell $151 million in shares, and its offering is rumored to be priced on Tuesday after the close, with trading beginning Wednesday.
The stock is expected to sell for between $13 and $15 per share, which would give the company a market cap of at least $932 million. That's 8.4 times revenue, which is steep for any company, but SolarCity is growing rapidly.
I took a deeper look at the company here, but I'd still be cautious about the IPO. There are far more stable and even profitable companies such as First Solar (NASDAQ:FSLR) on the market, and I wouldn't risk my money on SolarCity just yet. Give the company some time, though, and you may see a sustainable long-term winner, finally.
Elsewhere in solar
Solar is often thought of as a power source for roofs or utility-scale projects, but Hurricane Sandy brought a whole new need. Thousands of people were without power for days at a time, and solar generators were used to provide power to some of those people. Even today, Consolidated Solar, a generator startup, is providing solar generators used in cleanup.
The generators can be used to power tools, laptops, cell phones, and other small devices. This is just another use of solar panels that wasn't financially viable just a few years ago. But as costs fall, there will continue to be new uses popping up from startups like this.
Fool contributor Travis Hoium and The Motley Fool have no positions in the stocks mentioned above. Motley Fool newsletter services recommend First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.