Even a stronger-than-expected fourth quarter hasn't lifted the tenuous position of many of the world's solar manufacturers. There's too much supply in the market and very little differentiation between products, and some balance sheets are absolutely terrible.
Consolidation has been predicted for some time, with little action from manufacturers. But eventually something has to give. Either companies with weak financials and low-margin products go bankrupt, or they sell to an interested buyer for fire-sale prices. Suntech
The tough question is, how will it happen? U.S.-based companies such as SunPower and First Solar aren't likely buyers of Chinese suppliers, who generate most of the world's modules, because they have differentiated products in their own right. So consolidation will probably take place inside China, where government loan subsidies could be transferred from one company to another. Let's look at the likely candidates.
Who's in trouble
If companies were looking for equipment and capacity on the cheap, JA Solar or Jinko Solar would be good options. But will buyers emerge before short-term funding dries up for these companies?
Despite the overcapacity in the market, Chinese suppliers are always looking to add capacity, and acquisitions may be a way to do that. But the number of buyers is fairly limited. Trina Solar, Yingli Green Energy
Yingli Green Energy had $1.3 billion in short-term debt and another $431.7 million in long-term borrowings as of the third quarter, with almost $930 million in cash. At the same time, Suntech had $1.6 billion in short-term debt -- triple the amount of cash on hand. Those aren't balance sheets that lend themselves to acquisitions. Trina Solar also has more debt than cash, but with less than $400 million classified as short term, it could be a buyer of a company at the right price.
Buyers outside the solar industry may emerge as well. Total bought a majority stake in SunPower last year, and other companies could be targets. General Electric is expanding its sold unit, Sharp is quietly one of the biggest solar manufacturers in the world and could expand through acquisitions, and I've argued for years that 3M should get in the game.
What happens next?
I'm most interested to see what happens next in China. Will the Chinese government support solar companies indefinitely, or will the short-term funding end eventually? More importantly, what happens to the first company that fails in China? Will shareholders be wiped out, as they would be in the U.S. or Europe, or are the rules of the game different?
There aren't any obvious buyout targets or buyers in solar right now, making consolidation difficult to predict. That's why I would stick with companies with strong balance sheets and industry-leading margins right now. Someone is going to fail, and you don't want to be riding a leveraged balance sheet to the poorhouse. For another energy stock, check out our report called "The Only Energy Stock You'll Ever Need."
Fool contributor Travis Hoium owns shares of First Solar and SunPower in a personal and managed account. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.
The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar and 3M and creating a diagonal call position in 3M. 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.