NEW YORK (
) -- The first significant solar earnings reports of the fourth quarter played out according to expectations, with numbers above the Street for the final quarter of the year, and solar management bullish about 2011.
( SPWRA) and
Yingli Green Energy
hitting the play button for the beat and raise solar tape on Thursday and Friday.
Next Tuesday, after the President's Day holiday, Chinese solar cell leader
, Chinese low-cost solar module leader
and U.S. solar inverter company
( SATC) will all report.
Coming into solar earnings, fourth quarter outperformance was expected, yet some analysts thought companies might be more conservative given the uncertain policy outlook in Europe, especially in Italy, which was a big part of the fourth quarter story.
This thesis didn't turn out to be the case. SunPower said it's confident Italy won't be making any changes to its policy in 2011, or in the least, changes won't impact its business. Yingli Green Energy said it doesn't expect any changes to the feed-in tariff system in Italy in 2011.The commentary from SunPower and Yingli deserves a little more analysis.
If SunPower and Yingli are providing an accurate picture of Italy, then 2011 could be like 2010, when fears of policy changes in Germany spooked investors, yet demand grew more than ever before within the solar sector. That said, the recent rally in the solar sector of 30% to 35% seems to have embedded within it the idea that Italy will either make no significant change or move so slowly that solar is safe, at least for 2011. In fact, the "push out" of the fear argument to 2012 is already being reflected in Street research. In a positive note covering the Yingli earnings, Collins Stewart analyst Dan Ries was referring to 2012 as the "difficult year' for the solar industry.
A measure of caution should be used with any company trying to predict Italian solar policy. For SunPower, if the company can say for sure that there won't be any significant policy changes in Italy in 2011, then they may as well go ahead and tell the world who will win the next U.S. presidential election. An Italian solar lobbyist featured on a Morgan Stanley conference call this week said that changes could take effect in September 2011 or March 2012, and both time lines have been proposed by various entities within the government.
For SunPower, specifically, though, this timing issue may be immaterial. Italy is expected to have a grandfathering clause for solar projects, no matter what it does. SunPower showed in its earnings that its project pipeline in Italy for 2011 is expected to be under construction by September 2011, which could insulate it even from an earlier date for policy change in Italy.
For Yingli, on the other hand, the commentary regarding potential feed-in tariff changes in Italy seemed to miss the mark. A Yingli official said on the earnings conference call, "We don't expect additional FIT changes beyond what the Italian government already announced." However, the policy changes being contemplated for Italy as early as September 2011 would not involve the FITs, but restrictions on the size of projects that can be built on agricultural land. The Italian solar market is at this point geared to the project market and changes to the project market could be as important, if not more important, than an FIT revision.
In any event, even when comparing Italian solar policy apples to apples, no one seems to have a clear handle on the situation. Take these two comments sent to
by solar researchers this past week. One comment indicated that if Italy put a 1MW restriction on place for projects on agricultural land, it could kill the Italian market because as much as 90% of the business is on ag land. Another commenter said the restriction on ag land would be a great thing if it's the only change made by Italy, because even if 90% of the solar projects are on ag land, 75% of that 90% are projects of less than 1MW in size.
Solar investors didn't learn much about Italy from the call, and that's the way it has to be, since no one knows for sure what is going to happen, or even seems to know how much of the Italian market would be impacted by a policy change related to agricultural land.
From a trading perspective, the issue into earnings next week is whether solar stocks sell on the news, as investors take profits, or continue higher on strong fourth quarters and bullish commentary about 2011.
The SunPower and Yingli reports didn't really give a true read on this trading question. SunPower was up by as much as 12% on Friday morning, but by the end of trading was up only 3.5%. Given that SunPower shares already rose 35% this year into earnings, being up another 3.5% wasn't anything to sneeze at, but there was clearly the profit-taking in evidence as the day continued.
ended trading on Friday down by 1.6%, but is already up over 30% this year and trades at a multiple that it twice the level of any other stock in the group.
For the Chinese solar stocks, Yingli couldn't keep up with
on Friday, as Suntech shares rose by 5.7%, compared to Yingli's 4% gain on its strong earnings. All of the Chinese solar stocks are up 30% this year into earnings. Trina ended down marginally on the day, and
declined by 3.5% on Friday.
On pricing, Yingli towed the typical solar, saying pricing should be flat to slightly down in the first quarter, down a little in the second quarter, and in the second half of year, show a low single digit to mid single digit decrease. Yingli also provided shipment guidance of 1.7 gigawatts for the year, a 60% increase over 2010, but it will ultimately come down to its pricing and margin assumptions being accurate and not the shipment figure.
The problem for these Chinese stocks is that most, like Trina, remain near the top of their recent trading charts and given the uncertainty in the market - though not among solar management companies - and the multiples at which solar stocks have traded, especially the low multiple Chinese stocks, putting new money into solar stocks at these levels could be tough for the faint of heart.
The biggest one-day losses (like Canadian Solar) and gains, like Suntech Power and
on Friday, China Sunergy was up more than 5% and more than Yingli, could offer a variety of speculative trading theories. Suntech has had the best success of the Chinese solar companies in the U.S. market, recently winning a 150 MW project module supply contract, and the U.S. solar market bullish trade could benefit Suntech. China Sunergy, trading at 6 times earnings as multiples on Yingli and Suntech are on the verge of being stretched to double digit multiple territory, doesn't need much of a trigger for some bullish action.
The bottom line in the mixed trading on Friday may be reflected in the comment by Wells Fargo analyst Sam Dubinsky in a positive research note about Yingli: "We prefer not to chase solar stocks following good quarters given subsidy uncertainty, but remain constructive on Yingli long-term due to its integrated business model and its early lead in China deployments."
There could be some surprises on deck from the solar companies yet to report within the beat and raise. SunPower isn't really a good read on the sector overall. Yingli turned in better than expected margins, but some of the Chinese solar players could see higher internal costs based on the spot market prices for wafers and polysilicon.
Auriga Securities thinks that rising input costs could be a factor in gross margins reported by Chinese solar companies - amid good reports - and singled out
as an example. Yet sales conditions were strong in the fourth quarter and heavy in Italy - where generous feed-in tariffs support higher average sales prices. Yingli Green Energy reported an increased ASP in the fourth quarter, however, Yingli does not buy external cells or wafers. Yingli said to expect polysilicon prices to remain at or near current levels for the first half of the year, and prices have been higher than anticipated.
In any event, the uncertainty about 2011 and the European demand won't be answered by any of the solar companies, and with decisions looming in Italy and France (albeit a much less significant market than Italy) there's potential negative catalysts on the horizon, at least as many as potential positive catalysts, with fourth quarter beats and bullishness already expected, and the stocks trading at the top of their respective trading charts for an industry still dogged by the policy risk issue. Either solar stocks break out of the compressed multiples related to uncertainty, or they trade according to patterns, but either way, the mixed reaction to the SunPower and Yingli earnings didn't provide an easy answer.
For SatCon, the solar inverter companies have been the big disappointment of the earnings season so far. Both
Advanced Energy Industries
declined significantly after earnings. For Power-One, the weak first quarter outlook was related to a European market inventory glut, and that's not a market in which SatCon's business is primarily focused. For Advanced Energy Industries, among a host of issues was the fact that it's had a big business in the Czech Republic (among the much smaller part of its inverter sales in Europe as opposed to the U.S., that is.) The Czech Republic has put a hard stop on its solar growth in 2011 and at the same time, AEIS faces more competition in the U.S. as Power-One and Germany's SMA Solar try to take U.S. market share.
SatCon is focused on the large-scale solar project market in the U.S., and in the fourth quarter there was a good deal of activity, some of it because a cash grant program for solar projects was set to expire at year-end (section 1603 of IRS code, which has since been extended).
SatCon isn't just a read on the inverter market, but on conditions in the U.S. solar market more generally, and since a good deal of the bullishness from solar management companies in 2011 is predicated on the U.S. becoming a core replacement for declining European countries, what SatCon has to say about the pace of growth in the U.S. solar project business and its own outlook for 2011 goes beyond the specifics of the inverter market issues that dogged Power-One and Advanced Energy Industries.
The reaction from the Street to the SunPower earnings was roundly optimistic, with numbers being taken up to reflect the outlook from both companies. However, given the 30% to 35% rally in the sector year-to-date, the lack of a big rally for the sector on Friday was not surprising. For a sector that's been volatile to its core, asking investors to stretch stocks much beyond current levels may take more than the typical beat and raise report.
-- Written by Eric Rosenbaum from New York.
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