Wednesday, May 6, 2009

Solar Stocks: Early Signs Of Life But Caution Still Prevails

. Wednesday, May 6, 2009

By stockOzone team

Last few months have been quite tumultous for solar stocks.Solar industry was hit hard by a deepening economic downturn, slowing government subsidies, credit crunch and a slump in crude oil prices. The industry suffered from huge surpluses of silicon inventory, which in turn pressurized prices. It got very difficult for companies to arrange capital to finance solar projects. According to publisher New Energy Finance, global investment in renewable energy during the first quarter dropped to $13.3 billion from $28.3 billion a year ago.

Most of the Solar companies have reported disappointed quarterly results.

SunPower Corp. (SPWRA) swung to a first-quarter net loss of $4.79 million, or 6 cents a share, compared with net income of $12 million, or 14 cents a share, in the year ago quarter.Revenue plunged 22% to $213.8 million.

Similarly, Evergreen Solar Inc (NASDAQ: ESLR) reported that first-quarter net loss widened to $64.3 million, or 40 cents a share, compared to a loss of $25,000, or break-even per share, in the year ago period. Gross margin plummeted to 1.2% compared with 33.6%.

Among Chinese solar stocks, Suntech Power (NYSE: STP) has already said it that expects first-quarter results in the solar-cell industry to be flat or slightly lower than the fourth quarter.The company has also announced plans to slash its 2009 capital-spending budget by 70%.

In March, LDK Solar (NYSE: LDK) issued a first-quarter revenue view well below consensus estimates and said that 2009's gross margin would fall steeply.

First Solar (NASDAQ: FSLR) deserves a special mention here. The largest solar company by market capitalization has continued to defy all the expectations with stellar performance. Based in Tempe, Arizona-based First Solar, Inc. engages in the design, manufacture, and sale of solar electric power modules using a proprietary thin film semiconductor technology. The company's solar modules employ a thin layer of cadmium telluride semiconductor material to convert sunlight into electricity.

Last month, the company reported first quarter profit that beat Wall Street expectations. Net income soared to $164.6 million, or $1.99 a share, from $46.6 million, or 57 cents a share, in the year-ago period. Revenue climbed 112% to $418.2 million from $196.9 million. Consensus estimates were for earnings of $1.52 a share on revenue of $396.5 million. But the most impressive metric was gross margin, which hit a record of 56.3% from 53%.First Solar produced 219.5 megawatts of solar panels in the first quarter, up 26% from the previous quarter.

First Solar attributed the outstanding quarterly resuls to lowered panel prices, an exchange rate decline for the euro and a change in customer mix. Thanks to the additions in Malaysia, First Solar was able to lower its production cost to $0.93 per watt during the quarter from $0.98 per watt in the previous quarter, 5% reduction quarter-over-quarter and 18% year-over-year. The company ran two of its Malaysian factories at full capacity and improved the production rate at its third factory. The company retains its cost leadership position and aims to cut the production cost to 65 cents per watt by 2012.

This year, the company has reached two milestones-it built a total of 1 gigawatt of photovoltaic modules, and its manufacturing costs have dropped below $1 per watt.The company operates plants in Ohio, Germany and Malaysia, and plans to double annual production capacity to more 1,000 megawatts by the end of this year.

However, a number of factors will ensure that it will continue to perform well despite negative headwinds. The company is way ahead fo its perer as it makes cadmium telluride photovoltaic solar panels, that are cheaper to produce than the typical silicon-based cells that dominate the market.

Globally, solar industry depends upon government subsidies and incentives. Most of the bigger economies like US, China, German, Spain have already pledged increased assistance to the industry. Moreover, First Solar sells most of its panels in key European markets like Germany and Spain, where generous federal subsidies ensure high electricity rates for solar energy system. The U.S. market too is expected to pick as the current administration has approved federal subsidies for manufacturers as well as users of solar panels and solar energy systems. As part of the stimulus bill signed earlier this year, the federal government approved around $60 billion in loan guarantee authority and $30 billion in energy grants for renewable energy and transmission companies. Congress has also granted a 30% renewable-investment tax credit to help expand the development of alternative sources of energy. It is being expected that the federal money would become available in the second half of this year.

Recession has not stopped First Solar from expanding aggressively. In February, First Solar agreed to invest up to $200 million in a solar array in Germany that it plans to sell once the lending environment improves. Last month, the company agreed to pay $400 million to acquire the rights to develop utility-scale solar project being developed by rival OptiSolar. Also, the company is all set to enter the power plant construction business which in turn would provide a new source of revenue and would further popularize the installation of its solar panels in the United States. Recently, First Solar bagged a contract to build a 48-megawatt project in Nevada for Sempra Generation.

Unlike most of its rival, First Solar has got long-term contracts with most of its customers which has relativelt shielded it well from oversupply in the marketplace. Investors, financial institutions prefer stronger companies with proven quality and hence the future of First Solar looks bright.

Disclosure: Author does not own any of the stocks discussed here.

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