Solar Stock Swingers: Energy Conversion
05/11/10 - 04:43 PM EDT
(Energy Conversion Devices story updated for Tuesday market close and trading in Chinese solar stocks)
AUBURN HILLS, Mich. (TheStreet
) -- Investors can't seem to make up their mind whether the European Union "shock and awe" bailout package is going to be a good thing for the global recovery, and the daily turns from fear to euphoria, and back again to fear, continue to toy with the fortunes of solar stocks from China to the U.S.
Several solar companies including ReneSola (SOL)
and LDK Solar (LDK)
reported better-than-expected earnings on Monday, yet the double-digit rally in solar stocks was really not that outsized.
Given that the broad equity indexes were up 4% on Monday, and leading solar stocks like Trina Solar (TSL)
had fallen by as much as 23% last week as euro fears worsened, a rally of 10% in solar could be judged as relatively minor, according to analysts who cover the sector, and the daily travails of the stocks will continue to be heavily swayed by the euro.
The change from Monday to Tuesday was a case in point of the power of the euro that began exerting itself as the No. 1 issue for the solar sector last week.
By Tuesday morning, with the Monday euphoria replaced by renewed market uncertainty about the European currency, the solar rally was a one-day run-and-done occurrence, and most of the solar stocks were back in the red, led by the Chinese solar stocks. The stall in the recovery of the euro, and maybe even tangential macroeconomic concerns that China's property bubble and inflation were going to force government policies that will slow growth, were taking precedence over solar stock earnings.
JA Solar (JASO)
, which beat Street expectations in its earnings released early Tuesday morning, was down by 7.5% at the close on Tuesday. JA Solar not only beat the Street, but raised its guidance, and announced additional capital spending due to demand, typically all good things for a solar company to report. Yet on Tuesday, it couldn't help JA Solar avoid a losing day.
Collins Stewart raised its full year earnings estimate for JA Solar as a result of the Chinese solar cell maker's full year outlook, yet JA Solar's 7.5% decline was among the largest in the solar sector on Tuesday.
Suntech Power (STP)
, rallied along with all the solar stocks on Monday after it pre-reported selective earnings line-items, including revenue that would far exceed the Street consensus. At least one analyst, though, described the Suntech Power earnings pre-report as a "head fake"
and said an earnings miss was still on the way.
Indeed, Suntech Power shares were among the big losers in solar on Tuesday, down more than 5%. Trina Solar was down close to 5% by the close of trading on Tuesday.
The Chinese solar outperformers from Monday, ReneSola and LDK Solar, were both suffering through losing days on Tuesday, with ReneSola down more than 8% by day-end and shares of LDK down close to 6%.
In fact, amid all the solar earnings news and the market noise related to the euro and China, the only solar winner from Monday that continued to rise in Tuesday's trading session was Energy Conversion Devices (ENER)
, but even its gains were wiped out by the end of the day, ending trading on Tuesday flat.
There's a bit of irony in the fact that while the Chinese companies report better-than-expected earnings and attempt to recover from last week's steep selloff, it's a U.S. solar company that has been plagued by fears of bankruptcy for much of the past year that managed to sustain its rally during the renewed selling in the solar stock sector. Even though Energy Conversion ended the day flat, it was still notable that JA Solar was down 7.5% on Tuesday and ReneSola down more than 8% after reporting earnings beats.
Granted, a rally in Energy Conversion Devices' shares doesn't take much, as the U.S. solar stock is already priced near the low end of its 52-week range -- and has been for months. And other niche U.S. solar stocks were also among the only solar sector plays with positive trading on Tuesday, including Spire (SPIR)
and Hoku Scientific (HOKU)
Investors also need to keep in mind that Energy Conversion Devices hadn't traded below $7 a share before last week's big selloff, so recovering to near-$7 is not saying all that much.
From one respect, though, the Energy Conversion Devices performance on Tuesday showed that it is a very different solar animal than the commoditized module makers that are being hammered by the euro slide. Energy Conversion Devices has little business in Germany, which has been driving most of the demand for solar coming from Europe. The commoditization of the solar business has made the euro all-important as the solar module makers look to move as much product as possible into Germany, much of it manufactured in Asia and then sold in euros.
Energy Conversion Devices, on the other hand, with its niche solar laminate for the building integrated photovoltaic market (BIPV), is focused on France and Italy. It is not immune to the euro, though. Energy Conversion Devices estimates on its earning conference call on Monday that it currently has $15 million in euro exposure, and that a 5% move in the EUR/USD exchange rate would result in $750,000 of currency value gain/loss.
The overall atmosphere on the Energy Conversion Devices call from the Street on Monday afternoon was cautious scraps of congratulations from the Street. There was none of the usual "Congratulations on a great quarter.." that often prefaces any question from the Street to company management. Instead, analysts seemed to accept that Energy Conversion Devices had made good on its promise to show some progress, but the outlook was still uncertain.
Energy Conversion Devices increased revenue
, narrowed its quarterly loss, and decreased its cash burn rate -- however, the company is still in a cash-burn situation. "It's disappointing that they are still at a loss, but it's getting better, and it was a good quarter in general, but the biggest question mark is the same: finding demand for their niche product," said Burt Chao, analyst at energy market specialist Simmons & Company. "You can't flip a switch overnight, or over one quarter, and go from being a non-profitable company to a profitable one, but at least Energy Conversion is conservative and has not overpromised," the energy analyst added.
Wedbush Securities made much the same kind of concession in its view of Energy Conversion Devices in its post-earnings wrap. "We believe ENER is making progress but will likely continue to struggle as oversupply conditions resume in 2011 and demand for niche products like flexible BIPV remains below expectations.... We do believe the company is making progress on its turnaround efforts given its 200 megawatt project pipeline and increase in factory utilization."
Nevertheless, Wedbush took down its price target on Energy Conversion Devices shares from $7 to $6.
The U.S. solar company also noted that its focus on the 200 MW project pipeline will result in "lumpiness" to earnings, as it will be difficult to provide a timeline for when the projects hit -- and, even more importantly, the project business has the ability to soak up working capital and cash, something that a company already in a cash burn situation needs to watch closely. "We need to manage cash and we have to be clever in how we approach the project business," Energy Conversion Devices management said on the conference call.
A Citibank analyst, Tim Arcuri, noted to Energy Conversion Devices management that by his estimate, even with a decreased cash burn rate, the solar company will be at a level of less than $100 million in cash within six to nine months.
In response, the solar company's management said it has no plans to tap the capital markets again, and that it was looking at financing deals that would aggregate a number of smaller solar projects of the type in which it specializes into financing pools that could be attractive to investors. Still, the company was not ready to provide any details. "The trick for us is financing," Energy Conversion Devices management said, but the trick was still up its sleeve as far as how much it was willing to share with analysts.
Energy Conversion Devices, which has been running at 25% of capacity, will be at 50% of capacity in its next quarterly report. Even getting to 100% capacity will not alone result in the cost reductions that the solar company needs to become more competitive, Energy Conversion Devices management conceded on the conference call.
Chao said it is hard not to be concerned about the situation in Europe, even if Energy Conversion Devices is less directly hit by the weakened euro in the immediate. "Some things will be out of their control. What happens if the market in France takes a dip? The macroeconomic environment is not conducive to an aggressive build out in solar in Southern Europe, even with the huge bailout," Chao said. "Paying for solar is a pretty expensive deal as witnessed by what happened in the Spanish market in 2007 and 2008," the analyst added.
Energy Conversion Devices said on the earnings call that the Italian market was responsible for 50% of sales in the last quarter -- and that France, which represented 30% of sales in the first quarter, slipped in the most recent third fiscal quarter, but should grow again. The U.S. solar company downplayed concerns about additional feed-in tariff cuts in France, saying that the country already went through a year-long process of revising the subsidies and it did not think any additional changes were likely.
While Energy Conversion Devices definitely presents a distinct portrait from the crush of the commoditized solar stocks selling into Germany, some analysts remain concerned about the recent woes in Europe ultimately taking a toll on all solar companies. "At the end of the day, one solar company isn't more immune than another. If the euro keeps falling, the only argument to be made is that the euro is bad for solar," Wells Fargo Securities analyst Sam Dubinsky said.
Those words of caution have already been proven well-placed given the euro-related ups and downs in solar over the past few days.
The two biggest German solar companies, Q-Cells (QCE)
and SolarWorld (SWV)
both slumped in trading on Tuesday after reporting first quarter earnings, and the second half outlook from these German solar bellwethers could impact the entire solar sector.
Still, for at least one day, Energy Conversion Devices shares were proving immune to the larger trend in solar that again was hitting all the commoditized module markets and solar cell and wafer makers.
Yet at a share price still near a 52-week low, it's no surprise that even analysts who believe in Energy Conversion Device and its management are not ready to make a call on profitability. "Just because Energy Conversion Devices has turned the corner, does not mean it is in the clear," said Simmons' analyst Chao.
Energy Conversion Devices remains a big question mark for the Street, but even not being in the clear, the solar stock was clearly a Tuesday winner among the larger market noise still rattling through the solar sector.
-- Reported by Eric Rosenbaum in New York.
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