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Evergreen Solar: Don't Believe the Hype

Evergreen Solar pre-reports record shipments in Q1, but analysts are wary of the the solar company's selective disclosure.

DEVENS, Mass. (


) --

Evergreen Solar


pre-reported a few key first-quarter earnings data points on Monday afternoon, and the U.S. solar stock spiked on record first-quarter shipments and revenues that were slightly ahead of the Street consensus.

Evergreen Solar shares ended Monday up more than 5% and were up again in the pre-market on Tuesday morning by 9%.

Let the record reflect, however, that record shipments do not mean Evergreen Solar will be any more profitable in the current quarter than in previous quarters. In fact, two analysts who cover Evergreen Solar said on Monday evening that the data reported by Evergreen on Monday afternoon confirmed that the solar company has not managed to improve its cost structure in a meaningful way for shareholders.

Evergreen Solar has been under intense pressure as it moves its manufacturing to China to try to stay competitive in the solar industry. Analysts have said that

Evergreen Solar shares have more or less been priced as if the company was about to go bankrupt, and some analyst have concerns that just might happen if the solar company can't make the manufacturing transition to China successfully.

In addition, analysts are of the opinion that even with a successful transition to China, Evergreen won't be profitable until at the earliest some time in 2011.

Evergreen Solar pre-reported revenue of $78.5 million, the record shipment level of 35.4 megawatts, and a cost per watt of $2.20. Manufacturing costs were $2.05, which was little improvement over the previous quarter.

The revenue level of $78.5 million was more or less in line with Street estimates, even if slightly ahead of the consensus.

Where Evergreen failed to make any progress was in the cost per watt, and analysts said the fact that Evergreen Solar's costs remained among the highest in the solar industry made the record shipments somewhat meaningless as a data point.

With only two weeks to go until Evergreen Solar was expected to report its full earnings, the analysts also questioned the importance of pre-releasing the record shipment data when reading between the lines did not present a pretty picture for Evergreen shareholders.

Raymond James analyst Pavel Molchanov said the Evergreen Solar revenue level was in line with the Raymond James estimate -- however, Evergreen's gross margin level was much lower than the analyst expected. Based on the manufacturing cost of $2.05/watt released by Evergreen, the Raymond James analyst estimates a gross margin level of 7%. That's down from 12% in the fourth quarter for Evergreen Solar.

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Molchanov said that based on the gross margin level implied by the data released on Monday, Evergreen's per share loss in the quarter will likely be worse than James' estimate of a 5 cent loss. The Street is at a consensus loss of 9 cents for Evergreen.

Wedbush Securities Christine Hersey said the pre-report from Evergreen confirmed her bearish scenario for the solar company. Wedbush had estimated gross margins at 7.3%, and the analyst said on Monday evening that the manufacturing costs and revenue level pre-reported by Evergreen Solar indicate a gross margin level of 7.6%.

The Wedbush analyst was also frustrated by Evergreen's attempts to highlight record shipments without providing investors with a more thorough view of its earnings. "This is classic Evergreen, telling us what they shipped but nothing else," Hersey said.

As an example of Evergreen's selective method of news reporting, Hersey noted that Evergreen also filed an 8-K yesterday with the Securities and Exchange Commission that included potentially troubling earnings news. Evergreen noted in its 8-K that a new accounting rule would require it to measure share lending agreements at fair value.

Evergreen Solar had a share lending agreement with Lehman Brothers, and as a result of Lehman's bankruptcy, Evergreen could be required to recognize an expense of $140 million for the fiscal year beginning December 2009. "That would be one reason not to provide the earnings per share number in the earnings pre-report," Hersey said.

The Wedbush analyst also indicated the record shipment level about which Evergreen felt compelled to issue a press release was basically the level of shipments that she expected. Wedbush was at 35MW for the first quarter.

Both analysts said that the critical issue for Evergreen Solar has not changed, and that is manufacturing in China at a cost that allows it to be competitive. Evergreen Solar noted in its earnings pre-report that it is on schedule to begin manufacturing in China in mid-2010, but that wasn't news to the analysts who cover the company.

"I'm waiting to see the actual earnings," the Wedbush analyst said.

-- Reported by Eric Rosenbaum in New York.


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