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Six Solar Energy Stocks: The Heat Is On

Solar earnings season has not yet begun, but the surprises have already started -- as well as the earnings season's typically volatile trading in solar energy stocks.

NEW YORK (TheStreet) -- It's Earth Day's 40th anniversary, and solar technology has also been around for four decades. But as much as times change, some solar stock earnings season events remain constant.

There will be record announcements from solar companies -- there have already been several in pre-reported earnings. Yet a solar earnings season without negative surprises would itself be a surprise.

"It's the same pitfalls each time. Inventory, raw material costs, some hiccup with expanding capacity, or some problem with customer account receivables bad debt. You don't know who it will happen to, but it's always the same handful of things," said Wedbush Securities analyst Christine Hersey.

This quarter, add to the list of likely candidates for negative surprises any foreign exchange losses related to the euro's 6% first quarter slide.

In the run-up to solar earnings,

JA Solar

(JASO)

,

Evergreen Solar

(ESLR)

and

Canadian Solar

(CSIQ) - Get Canadian Solar Inc. Report

announced first quarter shipment levels that exceeded expectations.

There's plenty of reason to be positive going into solar earnings season, too, with the recent demand in Germany for solar installations exceeding even the most bullish scenarios.

Yet it's never that simple. Evergreen's record shipments were achieved amid weak gross margins, and Canadian Solar shares tanked by 15% on Wednesday after saying its gross margins would also disappoint, stemming primarily from a forex loss. Solar has surprised even before one earnings report is out.

The recent rally in solar may lead to short-term profit taking ahead of earnings reports, or on the slightest sign of any deterioration in gross margin or pricing in the second half of the year. Analysts say this has been a typical pattern in previous quarters for the typically volatile sector, and it's something that has pushed institutional investors away from the solar stocks.

That's how it went down last time around, with solar stocks being punished in the fourth quarter earnings period on any sign of gross margin weakness -- even though coming into the fourth quarter earnings, expectations were for a positive round of reports from solar companies.

In this earnings season, solar investors should receive a better look at just how pricing is shaping up for the second half of the year, when there is likely to be a feed-in tariff reduction in Germany. It's complicated by the fact that German politicians are meeting right now, and any surprise -- such as a further delay in the implementation of the FIT reductions -- could supersede earnings data and change the outlook in a hurry.

In light of all this, here is a rundown of some of the solar energy stock first quarter earnings reports to watch. Read on to see which solar companies will have fortune shine upon them.

The bellwether stock in the solar energy sector,

First Solar

(FSLR) - Get First Solar, Inc. Report

is usually among the first solar company's to report.

Earnings Date:

April 28 (after the market close)

Consensus Estimate:

$1.64 earnings per share

Fourth Quarter 2009 EPS:

$1.65 earnings per share (8.6% outperformance of Street consensus of $1.52)

50-day Moving Average:

$119.26

Share Price Gain or Loss on Day of Last Earnings:

-$10.29 (loss)

Lowest Share Price Since Last Earnings:

$98.71 (Feb. 25)

Highest Share Price Since Last Earnings:

$139.46 (April 15)

Key Issues and Earnings Themes:

In the last two quarters, First Solar beat the Street on the revenue line but disappointed on margins. Investors have known for a long time that First Solar's historic gross margin level of 56% was not sustainable. Investors knew that before the fourth quarter earnings, also, but still punished First Solar shares after the fourth quarter earnings report.

Does the same pattern emerge in the first quarter 2010?

Some analyst think that as a result of the recent rally in First Solar shares, the best expectations are already baked into the U.S. solar energy bellwether stock.

First Solar may only be able to surprise the Street by getting a higher average sales price than anticipated.

As far as growth, though, since First Solar is not bringing its eight new lines into production until 2011, what First Solar is capable of achieving in 2010 is already set, from the Street perspective.

Any reduction in the rebate levels that First Solar has been paying to get modules sold could also allow for some incremental improvement. Yet even though First Solar had a solid quarter in the fourth quarter of 2009, it still provided $57 million in rebates to German customers, according to Wedbush Securities.

Trina Solar

(TSL)

, like First Solar, has been among the bigger beneficiaries of the recent solar rally. Will it be able to keep the share price momentum going after its earnings?

Earnings Date:

TBD

Consensus Estimate:

61 cents earnings per share

Fourth Quarter 2009 EPS:

74 cents earnings per share (23% outperformance of Street consensus of 60 cents)

50-day Moving Average:

$24.15

Share Price Gain or Loss on Day of Last Earnings:

-$2.20 (loss)

Lowest Share Price Since Last Earnings:

$19.53 (Feb. 25)

Highest Share Price Since Last Earnings:

$27.57 (April 15)

Key Issues and Earnings Themes:

Trina Solar announced record gross margins in the fourth quarter of 32.6% and said it would double its shipments in 2010, yet its shares dropped on gross margin guidance for the first quarter of 26% and 28%.

Solar bulls said Trina Solar was just being conservative in its gross margin guidance, and investors will soon find out if the bulls were right.

Solar bulls also say that Trina Solar should be able to manage the declining average sales price environment better than many solar companies. Chinese solar energy companies had roundly forecast a flat average sales price environment for the first quarter.

The bottom line on Trina (reflecting its own words): don't expect a first quarter like the fourth quarter record numbers. Yet as a result, any Trina earnings surprise, either positive or negative, could lead to some volatile trading in its shares.

For

SunPower

(SPWRA)

, the last earnings season focus was on the resolution to its accounting misstatements. A disappointing first half 2010 outlook proved to be a bigger issue.

Earnings Date:

TBD

Consensus Estimate:

7 cents earnings per share

Fourth Quarter 2009 EPS:

48 cents earnings per share (2% underperformance of Street consensus of 60 cents)

50-day Moving Average:

$19.36

Share Price Gain or Loss on Day of Last Earnings:

-$3.06 (loss)

Lowest Share Price Since Last Earnings:

$17.75 (April 19)

Highest Share Price Since Last Earnings:

$19.36 (April 7)

Key Issues and Earnings Themes:

Last earnings season focus for SunPower was on the resolution to its accounting misstatements. The accounting situation turned out to be a minor issue, yet investors punished SunPower shares for gross margin deterioration and its first half 2010 guidance. Since SunPower guided investors to expect most of its revenue to be tilted to the second half of 2010, the SunPower earnings will probably be more important for the outlook on the second half of the year, and any pressure on average sales price.

SunPower told investors to expect a break-even quarter, more or less, in the first quarter of 2010, so expectations are not high going into the first-quarter earnings. The Street has already reduced its earnings outlook for SunPower shares, from its original forecast of 34 cents in the first quarter.

Gross margin performance was also a key to SunPower's previous earnings -- it dipped to 21.7% in the fourth quarter, lower than its 23.1% margin level in the third quarter. While gross margins on SunPower's systems business went up from 17% to almost 22% in the fourth quarter, its fourth quarter component gross margins were down by 5%, and down by 15% versus the year-ago quarter.

SunPower forecast an average sales price decline of 20% in 2010, which was slightly ahead of the 10% to 15% estimates provided by most solar companies. Given recent indications of a demand level in solar that could be stronger in the second half of the year than previously anticipated, any change in SunPower's ASP guidance should be more important than the first quarter numbers.

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It was SunPower's operations in the Philippines that dogged it in the past few quarter with the accounting misstatements. SunPower announced on Thursday that it was teaming with Silicon Valley-based Flextronics to manufacture 75 megawatts of SunPower solar panels annually.

The deal is expected to create 100 jobs and SunPower said it would allow the solar company to quickly deliver solar panels to customers in the Western U.S. On last quarter's earnings conference call, SunPower conceded that it had not been getting solar product to its U.S. dealers as the demand from Germany dominated selling efforts.

JA Solar

(JASO)

was one of the few solar stocks to rally on its fourth quarter earnings. Does JA Solar's recent pre-report of a higher level of shipments than expected foretell a second-consecutive earnings rally?

Earnings Date:

May 11 (before the market open)

Consensus Estimate:

18 cents earnings per share

Fourth Quarter 2009 EPS:

14 cents earnings per share (27% outperformance of Street consensus of 11 cents)

50-day Moving Average:

$5.36

Share Price Gain or Loss on Day of Last Earnings:

+52 cents (gain)

Lowest Share Price Since Last Earnings:

$4.41 (March 22)

Highest Share Price Since Last Earnings:

$6.43 (April 7)

Key Issues and Earnings Themes:

JA Solar was ahead on just about all counts in the fourth quarter, and as one of the first solar stocks to report, set a pace that was not equaled by its peers. JA Solar's gross margins improved by 4% in the fourth quarter, bucking the general trend in solar.

The first quarter is the second consecutive earnings period ahead of which JA Solar upped shipment guidance. JA Solar shares rallied after fourth-quarter earnings even though the shipment guidance had been previously revised upwards. Will the same rally play out again?

Some JA Solar bears think that because the firm is not among the vertically integrated Chinese players, it will be squeezed by pricing trends. Yet recent indications from the solar sector suggest that cell manufacturers like JA Solar are seeing more stable prices than previously expected, due to the high level of solar demand.

It's the same solar cell pricing strength that has led to some recent negativity on the

Canadian Solar

(CSIQ) - Get Canadian Solar Inc. Report

outlook, that should be a positive for JA Solar.

Is cell pricing going to be as strong in the second quarter as some Street analysts are saying, and how stable will cell prices be in the second half of 2010? JA Solar's earnings can provide a read on these trends.

So far it's been a U-shaped curve year for

Solarfun Power

(SOLF)

. Solarfun shares dipped on its unconvincing fourth quarter earnings, but have since been among the solar energy sector's biggest rally stocks.

Earnings Date:

TBD

Consensus Estimate:

19 cents earnings per share

Fourth Quarter 2009 EPS:

25 cents earnings per share (1 penny above Street consensus of 24 cents)

50-day Moving Average:

$7.52

Share Price Gain or Loss on Day of Last Earnings:

-68 cents (loss)

Lowest Share Price Since Last Earnings:

$6.21 (March 22)

Highest Share Price Since Last Earnings:

$9.39 (April 15)

Key Issues and Earnings Themes:

In the fourth quarter, Solarfun shares experienced a near-double digit share-price decline right after its earnings. Gross margin erosion in the fourth quarter and Solarfun's cost structure were bones of contention between the Street and the Chinese solar energy company on the fourth quarter earnings conference call.

Solarfun got the Street's message, and after a fourth quarter conference call that was considered by many analysts a disaster, the Street says that Solarfun has been out working the conference circuit throughout the first quarter of 2010 and attempting to reverse the year-end negative turn in investor sentiment.

Yet there are still quite a few questions for Solarfun to answer.

In the last quarter, analysts were concerned about the historical inventory of polysilicon that was priced higher than spot prices. Has Solarfun been able to work through the high-priced poly given the huge demand in the first quarter?

Even as Solarfun is building out internal capabilities, another point raised last quarter was the extent to which Solarfun was reliant on third-party purchases of cells and wafers. With cell and wafer pricing stability at a level previously unexpected, will the third-party purchases continue to be a drag on Solarfun's 2010 outlook?

It's always a concern that Solarfun is a microcap stock with which volatile trading is inherent. The fourth quarter earnings disappointment from Solarfun came after a 200% run up in Solarfun's share price in 2009. Does that make the recent rally in Solarfun shares a likely candidate for some volatile earnings season action?

Yingli Green Energy

(YGE)

didn't fare well in its fourth quarter earnings. Can Yingli turn the tide this time around?

Earnings Date:

TBD

Consensus Estimate:

22 cents earnings per share

Fourth Quarter 2009 EPS:

9 cents earnings per share (35% underperformance of Street consensus of 14 cents)

50-day Moving Average:

$12.55

Share Price Gain or Loss on Day of Last Earnings:

-75 cents (loss)

Lowest Share Price Since Last Earnings:

$11.53 (March 22)

Highest Share Price Since Last Earnings:

$13.65 (April 15)

Key Issues and Earnings Themes:

A big overhang on Yingli shares has been its polysilicon plant ramp up. In fact, it was a telling indication of just how important the polysilicon pant issue has become to Yingli when the Chinese solar energy company felt compelled to issue a statement in April saying it would not build the plant beyond 3,000 metric tones.

Investor concerns about Yingli were not eased when the China Development Bank recently said it was providing $11 billion in loans to Chinese solar companies, and Yingli was not among the winners -- Trina Solar and

Suntech Power

(STP)

.

For Yingli, a more definitive outlook on the poly plant and its drag on earnings will continue to be an earnings season issue. Last time around, Yingli could not rally on fourth quarter gross margin improvement, as its earnings came in short of Street estimates.

Yingli's shares plummeted after its earnings as expenses in the quarter doubled.

For the first quarter, analysts are focused on the extent to which foreign exchange losses, in particular, can bring negative earnings surprises. Yingli's fourth quarter 2009 earnings were negatively impacted by a foreign exchange loss of $7 million.

Yingli's outlook for 2010 was bullish, forecasting shipments of up of 950 MW to 1 GW, and a gross margin level consistent with fourth quarter outperformance -- 27% to 29% in 2010.

-- Reported by Eric Rosenbaum in New York.

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