Solar: Off the Ropes and Fighting Back

A majority of solar investors won't go as far as Credit Suisse in calling for 12.7 gigawatts of demand in 2010, but recent data points are triggering a solar rally.
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New York (TheStreet) -- Where have you gone, negativity about the solar sector?

After suffering through several months of almost unrelenting sour press regarding its outlook, the solar sector is back in the sun, courtesy of two very high-profile recent data points.

On March 26, Credit Suisse issued a 12.7 gigawatt demand forecast for 2010, far surpassing most solar sector demand prognosticators, who expect between 8 GW and 9 GW in 2010.

JA Solar

(JASO)

issued on Wednesday morning revised shipment guidance for the first quarter that sparked a second big rally in solar shares, with JA Solar being the biggest beneficiary, up 9.7% on Wednesday with a whopping 40 million shares traded.

The

Credit Suisse demand call itself led to a rally in solar shares that had been primarily trading down since mid-January.

Have the solar companies been holding back on more positive information than we thought they had to offer?

Trina Solar

(TSL)

also completed a secondary offering of shares in early March that led

some solar speculators to believe that Trina saw an opportunity to act quick and take advantage of a market more favorable than many supposed.

Buoyed by the JA Solar news on Wednesday, both

First Solar

(FSLR) - Get Report

and Trina Solar hit shares prices that the U.S. and Chinese solar bellwethers have not seen since Jan. 13.

Ditto for

Solarfun Power

(SOLF)

. Solarfun hit a share price on Wednesday of $8.59 that it had not come near since January. Some analysts said that

Solarfun was an example of a solar company with which one can make the argument that it has been undervalued and overlooked in the months of solar pessimism.

Solar analysts and investors continue to debate the Credit Suisse 12.7 GW forecast. Some contend that it's just part and parcel of solar forecasting, and the most aggressive forecasts are often no more wrong than the most conservative forecasts. The source can make a difference in these solar capacity crystal ball matters.

Consulting firms whose clients represent the conventional energy industry, interested in solar as a long-term sector to watch, tend to offer more conservative estimates because the quarter-to-quarter performance of these stocks is not of interest to them. Consulting firms that have made a big business catering to the solar companies specifically sometimes issue aggressive forecasts for their niche audience. It's not cut-and-dried, though, and there are solar consulting firms all over the spectrum from the most bearish to the most outlandish in terms of their annual forecasts.

"Our view is an information economics view, and the reason there have been massive booms and busts in solar is lack of good information," said Ted Sullivan, analyst with Lux Research. Sullivan is hopeful that solar is moving in the direction of narrowing its boom and bust forecasting from a 20% range down to 2%, but a timeline for that kind of accuracy does not cover 2010.

"There is increasing appetite, but the question to watch is the timeline, and I do think estimates over 12 GW are excessive. The hype in this market is baffling," the Lux Research analyst said. Sullivan added that demand forecasts are linked directly to solar subsidies, and as long as changes to the feed-in tariff schemes include potential surprises, demand forecasts will remain inherently a politically volatile information business.

The best advice for investors might be to pick some demand forecast in between the most conservative and most aggressive and cross your fingers.

Solar investors also need to ask questions. For example, if solar demand does reach 12.7 GW in 2010, where is that growth going to come from? What's to be the breakout market that not enough "knowledgeable" solar experts are taking into account? Everyone talks up China and the U.S., but could the real surprise come from a market like France delivering an unexpected demand bump and growing as quickly as Spain once did when it was the sudden darling market for solar?

Analysts note that Spain popped from 98 MW in 2006 to 591 megawatts in 2007, and to 2.6 GW in 2008. "Maybe we will see a big shift," said Kaufman Brothers analyst Jeff Bencik.

Another question posed by Wunderlich Securities analyst Theodore O'Neill is if the financing exists for a 12.7 GW solar market in 2010. The 12.7 GW level would represent a market that virtually doubles in size over its 2009 size, and there are questions as to whether the capital markets have sufficiently recovered to even finance that kind of short-term growth in solar.

Wunderlich's O'Neill says that if all these solar companies are pursuing the same limited financing, it means that balance sheets may be tapped to get solar projects done more than in the past. In that respect, the Wunderlich analyst said solar investors should not be looking at a 12.7 GW forecast as a positive for their stock holdings. "At face value it looks like a positive, but by year-end it could be a huge negative. A higher growth rate in 2010 dependent on deploying more of solar company assets to make it happen, that's just disturbing," O'Neill said.

Satya Kumar, the Credit Suisse analyst who authored the solar report, wrote in response to this question that there is sufficient conventional financing available to finance a solar market at the size of 12.7 GW.

Lux Research's Sullivan added that private equity firms in the U.S. are really starting to understand solar projects -- particularly one in a country with a long-term feed-in tariff in place -- as an investment that is more or less like a 20-year government bond, and the risk free nature of this economic asset compares favorably with treasuries today with returns of 8% to 10%.

Given all this, the question we ultimately asked to

TheStreet

readers was the most direct one:

What is your prediction for solar demand in 2010?

The results were -- not surprisingly given the recent improved solar outlook -- somewhat bullish.

While there was not a majority of solar watchers willing to hop on board with the Credit Suisse 12.7GW forecast, 44% of survey takers did indicate that they are in the most bullish camp.

Another 17% of survey takers said that 10 GW to 11 GW was their solar demand dart toss for 2010, the second most popular response.

Solar bears, as is often the case, were the caboose of this poll group, with only 6% of survey respondents saying that demand of 8 GW to 9 GW in 2010 -- where most of the actual forecasts have come in -- will be the actual demand level.

Another 13% of survey takers believe that the right level of solar demand to forecast is 9GW to 10GW, while 12% of solar watchers think 11GW to 12 GW will be the actual demand mark.

So one thing remains as constant as the north star in solar: solar demand forecasts remain all over the place. However, the difference on Wednesday, after the JA Solar news -- and stretching back to the Credit Suisse demand call -- seems to be that solar has burned out on pessimism. There is, in other words, a growing chorus of solar bulls willing to place their bets on a better outlook than previously anticipated.

RELATED STORIES:

>>JA Solar, Solarfun: Solar Winners

>>Solar Sector: Who's Shorting Who?

>>What's Your Solar Demand Outlook?

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