Higher oil prices are not helping solar stocks. Instead, earnings disappointments and hand-wringing in Italy over solar subsidies and policy have put downward pressure on almost the entire sector. While it seemsthe second half of 2011 could be rough for solar stocks, the currentsell-off seems to be creating some buying opportunities.
First Solar (FSLR)
FSLR reported earnings last week. The company tightened 2011 guidance on earnings per fully diluted share (EPS) to $9.25 – $9.75 from $8.75-$9.50 and revenue (net consolidated sales) to $3.7-3.8B from $3.7-3.9B. Thesmall reductions at the top-end are a little disappointing, but otherthan that minor surprise, the results seemed to say “steady as shegoes.” FSLR sold off 5% the following day and is now down over 10% since reporting earnings. The stock has moved right back into the gap downcreated by October’s disappointing earnings results. However, given FSLR was as high as $175 ahead of these latest earnings, I think the current reaction reflects expectations that got too lofty. My upper valuation target on FSLR for the next 6 months remains $160 although the recent move to $175 provides additional upside potential from a technical perspective.
I listened to the earnings conference call and took note of a fewthings that stood out to me. I was most intrigued by FSLR’s descriptionof its ability to respond flexibly to a potential slowdown in Europeansales, especially in Germany and Italy, by increasing sales in otherregions. This capability is earnings management at its finest.
Highlights from First Solar Earnings Conference Call
- Potential for a surge in projects in the first half of the yearahead of reductions in subsidies in Europe (especially Germany andItaly). This could cause a subsequent slowdown in the second half.Working to mitigate these risks as follows:
- Pricing in the 3rd party module business is sufficient to drive sell-through
- (As in 2010) use 4.2GW project pipeline in North America as a buffer against risks in Europe. Will also be increasing pipeline.
- Market development in North America, India, Australia, and China
- Flexibility is focused on 2nd half of the year – FSLR could go up to the 700MW range
- Driving lowest LCOE and maximize yield.
- Working to encourage policy in Texas and Florida to support sustainable solar projects.
I was surprised that Goldman Sachs raised its price target on FSLR to $190 on the heels of this report, but I am embracing the latestpost-earnings disappointment as another buying opportunity. I finallytook the plunge and bought back some FSLR as it retested its 50DMA. I am looking for a bounce from oversold conditions.
Jinko Solar (JKS)
JKS delivered great results and even better guidance.
“For the first quarter of 2011, JinkoSolar expects total solar moduleshipments to be in the range of 155 MW to 160 MW. Total revenues areexpected to be in the range of US$280 million to US$290million. TheCompany expects to increase its in-house annual silicon wafer, solarcell and solar module production capacities to approximately 900 MW each by the end of the first quarter of 2011.
For the full year 2011, total solar module shipments are expected tobe in the range of 950 MW to 1,000 MW. Total revenues are expected to be in the range of US$1.4 billion to US$1.5 billion. The Company expectsto increase its in-house annual silicon wafer, solar cell and solarmodule production capacities to approximately 1,500 MW each, as compared to its original guidance of 1,000 MW each by the end of 2011.”
The 50% increase over the original guidance for in-house capacitiesis quite remarkable! JKS apparently needs the capacity to keep up withthe expected demand. The revenue guidance for the first quarter is 20%higher than consensus and revenue guidance is as much as 50% aboveThomson Reuters consensus for all of FY2011 (consensus data frombriefing.com). So, it was no surprise that such a highly shorted stock (about 25% of float) gapped up over 11% in reaction to this news. Unfortunately, shortlyafter the open of trading news broke about reductions in Italy’sgenerous solar subsidies and down went JKS. It closed the down 4%.
The concern for JKS is understandable: 88% of Jinko Solar’s Q4 shipments went to Europe and half of that went to Italy. However, with a forward P/E under 5, price-to-sales just over 1, andprice-to-book a hair over 2, it seems a lot of risk is already pricedinto JKS. If I had sold my holdings at the post-earnings open (as I wasso tempted to do), I would have already started buying back in. As itis, I am just continuing to hold.
ReneSola Ltd (SOL)
Tuesday’s post-earnings sell-off in SOL was a very surprising event for this latest round of solar earnings.
2010 marked a return to profitability for SOL after two years of losses. So it is doubly disappointing that SOL started 2011 by issuing guidance below expectations: for Q1, SOL expects $310-330M vs. $342M ThomsonReuters consensus (briefing.com).
“In 2011, we expect to face increased market competitiondue to additional solar capacities that had been added. Accordingly, wehave secured over 20 long-term contracts in 2010, representing 1.3 GW of expected wafer sales in 2011, while our in-house polysilicon production will satisfy approximately 30% of our internal polysilicon demand with a full-year average cost per kilogram between US$40 and US$45.”
With full-year shipment guidance of 1.6-1.7GW, SOL has a substaintial amount of its sales locked up. So, an exceptionally low valuation makes SOL a tempting purchase: forward P/E under 5, price-to-sales 0.8, and price-to-book 1.6. SOL has become a favored solar play for me, and I have been on the hunt to start buying back in. The stockis currently retesting the 200DMA and holding on, but with the 50DMAdirectly overhead, I will try to stay a bit more patient.
JA Solar (JASO)
I have been looking for an excuse to buy into JASO for a while. With a10% post-earnings sell-off on good headline results, I thought I had agood enough reason to start nibbling. I added one more tranche on Monday’s retest of the 200DMA.
JASO has locked in 90% of its shipment guidance for 2011, so I havebeen a little more aggressive than usual. It goes without saying that JASO has a low valuation: forward P/E under 5, price-to-sales of 0.7, and price-to-book of 1.1.
“Based on strong customer demand for JA Solar’s productsand a number of new customer wins, the Company currently expects totalcell and module shipments to exceed 2.2GW in 2011, representing anincrease of approximately 50% compared to 2010. Module shipments areexpected to be approximately 500MW to 600MW. Sales contracts signed todate for 2011 delivery amount to more than 2GW, representingapproximately 90% of the Company’s expected shipments for 2011.”
Satcon Technology Corporation (SATC)
Inverter companies were slammed hard this quarter, starting with German inverter company SMA warning about the impact of cuts in German subsidies. As late as September, SMA was still talking about a bullish near-term future. Subsequent reports from inverter companies also came in weak, but SATCreceived special punishment. SATC dropped 27% post-earnings and evenclosed below its 200DMA. I decided to take advantage of the firesale and start nibbling on shares.
SATC’s 2011 outlook included Q1 revenue guidance below expectations of $75.4M (briefing.com):
“Looking at the first half of 2011, we expect to see some seasonaleffect coming from the European region and the North American commercial rooftop business. However, we expect this slowdown to be offset bystrong sales into the North American utility-scale market, and ordersfrom our Chinese partnerships.
With a mix shift of sales from Europe to Asia, where ASP’s tend totrend lower, coupled with a higher proportion of our sales coming fromour newest technology, including the Solstice 500kW solution, which isnot yet fully transferred to our high volume Asian manufacturingfacility and Asian sources, we expect Q1 revenues to be in the range of$65 to $70 million with our gross margin between 25% to 27%…As we lookout to Q2, we expect a significant increase in volume from Europe andNorth America, and increased gross margin on improvements in our supplychain and greater utilization of our Asian manufacturing facilities. Weexpect to continue our run of operating profitability throughout theyear.”
While I have completed a full year of abstinence from shorting solarstocks, plenty of traders are still doing it. I have posted an update of the shorting activity in a select group of solar stocks. I have divided the charts into two groups to make them a bit easier to read. Note inparticular how short interest soared on SOL and JASO ahead of poorreactions to earnings.
Click graphs for larger views…
Source: nasdaq.com (for example, FSLR short interest)
My pockets are now more full with solar stocks than I expected afterthis round of earnings given the risks for the second half of this year. I am encouraged by the relatively strong guidance from most solarcompanies, but surely any miscalculation will have wide repercussions(like under-estimating the potential for cancellations or assuming onlyyour competitors are the ones who risk under-utilizing capacity).Waiting to buy on the dips mitigates the inherent risks of speculatingin what are essentially “hyper-cyclical” stocks, but it does noteliminate the risks. Now, I brace myself…
Be careful out there!
Full disclosure: long FSLR, JKS, JASO, SATC, ESLR (Also on the radar: SOLR, TSL, LDK, and SPWRA)