GT Solar: Solar Overcapacity Indicator?
MERRIMACK, N.H. (
) --
GT Solar
( SOLR) may be a thinly traded stock, but its earnings could be very important to the overall solar outlook.
GT Solar will report its earnings after the market close on Tuesday, and more important than GT Solar's earnings per share is the ways in which GT Solar's numbers may provide at least a partial answer to the ever-present question about the solar sector's supply/demand balance.
Equipment maker GT Solar's orders rise and fall based on the outlook for solar demand, and with the German feed-in tariff situation still unresolved, the supply/demand balance for solar is a critical point of uncertainty for investors in this earnings season and in trying to peg 2010 performance.
It is not surprising, therefore, that analysts who cover GT Solar are divided on which way its Tuesday's earnings will lean in providing an indicator on solar supply and demand.
Adam Krop, an analyst at Ardour Capital Management, is expecting the GT Solar earnings to mirror the uncertainty on the question of solar overcapacity.
Titus Menzies, analyst at London-based Libertas Capital, on the other hand, thinks GT Solar may surprise with a higher level of bookings than anticipated, and that would be an indication that the supply/demand balance will turn more favorable for solar sooner rather than later.
GT Solar supplies furnaces to produce solar wafers and reactors to produce solar cells. The key difference between the two main business lines of GT Solar is the timeline for orders. Furnace orders can be met within four to five weeks, whereas reactor orders have a nine- to ten-month lead time.
"Our general thesis is that it comes back to solar oversupply," Ardour Capital's Krop said. "Many places along the solar value chain are oversupplied, including both the solar-wafer and solar-module areas, and we think it will take another year or two before there is a significant pick up in orders," Krop explained.
The good news from Krop -- even with his negative outlook on the solar supply/demand balance -- is that he believes GT Solar has positioned itself to outlast any short-term overcapacity. "GT Solar is in a tough spot, but they have a good backlog of business and no debt, so they should be able to wade it out until industry expansion happens again," Krop added.
GT Solar stock has moved up recently on news that it won a $40 million new contract with Chinese polysilicon giant GCL-Poly Energy Holdings. The $40 million contract led to GT Solar's share price hitting $6.31 on Jan. 21, its highest level since an early August price of $6.98.
While GT Solar management is sure to talk about the GCL-Poly deal with the earnings, Krop said investors should be aware that the current stock price already reflects that news development. What's more, investors will want to look at the level of order cancellations in the fourth quarter, to see if cancellations rose to a level where the $40 million in new business from GCL could amount to no more than a wash.
Libertas Capital's Menzies did note that on previous calls GT Solar said there was room for a 20% cancellation rate on orders. If the cancellation number is at 20% or lower, the outlook is fine, but if the cancellation level is significantly above that 20% guidance, Menzies says it means big downside risk on GT Solar.
One positive aspect of GT Solar is its gross margin performance -- it has been a reliable generator of gross margins in the 30% to 40% range. GT Solar is a lean business with low overhead and can easily generate margins in the 30s -- getting back to the 40% gross margin level or above, however, is predicated on a more bullish view of solar capacity.
While Ardour Capital's Krop doesn't expect that recalibration of supply and demand to take place in 2010, Libertas Capital's Titus Menzies is leaning toward this more bullish outlook on solar demand, and GT Solar's potential order improvement.
Menzies says that anecdotal evidence suggests that despite the German feed-in tariff cut, the average sales price of solar modules had come down so much that solar will still be attractive to developers and utility-scale projects.
If that's true, orders for GT Solar reactors should be climbing because they take nine to ten months to be completed. "Solar developers will be trying to get production of cells and modules up again ahead of demand, and we should start seeing those orders flowing through in this quarter, because the earliest those orders would be delivered is next October," Menzies explained.
Menzies noted that in the last quarter, GT Solar booked $11 million in new reactor orders, which he described as nothing, and that it would take a move in that order number to the mid- to high-double digits to supply the more bullish solar supply/demand outlook. However, while Menzies believes GT Solar may surprise with a higher level of orders than current overcapacity concerns dictate, he cautioned investors to break out new orders from the doubling up of orders from existing customers.
"For GT Solar's stock to break out, it is all about strong order momentum," Menzies said.
Given GT Solar's current stock price of $5.95 at midday Tuesday, it would take an earnings surprise to make GT Solar an attractive buy. Menzies has GT Solar's fair value at $6.
Ardour Capital's Krop doesn't even think the supply/demand balance is likely to be answered in GT Solar's favor in the after-market earnings on Tuesday. Krop explained that there is approximately 70,000 metric tons of polysilicon capacity currently, which when divided using a rate between 6 and 7 grams per watt, means there is 10 GW of solar capacity, for an industry that Ardour Capital expected to complete a total of 5.5 gigawatts (GW) in 2009.
"The solar industry is well ahead of demand, and we think demand will pick up, even in 2010 compared to 2009, but the big shift will not occur until 2011 or 2012," Krop said, adding, "I just don't see enough in the near-term to see those reactor orders going up."
In the least, for solar investors concerned about potential oversupply -- especially in light of Germany's feed-in tariff reductions -- the GT Solar orders number and cancellations number in today's after-market earnings should be a potential solar leading indicator data set to watch.
What's more, since many of the big Chinese solar players don't report until toward the end of the earnings season, such as
Yingli Green Energy
(YGE)
,
Trina Solar
(TSL)
and
JA Solar
(JASO)
, GT Solar may have to stand in for a few weeks as the solar crystal ball.
MEMC Electronic Materials
(WFR)
will
also be reporting on Tuesday .
-- Reported by Eric Rosenbaum in New York.
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