NEW YORK (
) -- The solar sector has been on a significant rally in recent weeks as demand in Germany appears insatiable -- although the solar rally hit the wall last Friday with the general market selloff. On Monday, the solar sector-specific selloff is continuing with some notable downgrades.
All the action in solar ratings circles back around to
the huge -- and unexpected -- level of demand in Germany, and how it filters through pricing across the solar supply chain.
In the case of
, Collins Stewart downgraded shares of Canadian Solar from buy to hold on concerns that cell pricing will cut into Canadian Solar's earnings power in the second quarter.
Canadian Solar's reliance on third-party cells is a negative for Collins Stewart, as opposed to the internal cell capacity at true vertically integrated solar companies like
Yingli Green Energy
Collins Stewart research suggests that spot prices for solar cells have risen to $1.30-1.40/watt range from the $1.25/w level seen in January. "The $1.35/w midpoint suggests that even buyers of cells with world class cell-to-module conversion cost of $0.35/w will need a module price of $1.90/w to earn a 10% gross margin," Collins Stewart analyst Dan Ries wrote. However, Collins Stewart thinks module pricing in the second quarter will on average be $1.75/w.
The Collins Stewart downgrade is the second time in as many weeks that the solar company has come under pressure from the Street view of the solar outlook, and Canadian Solar's margin performance specifically. However, timing for a negative earnings surprise for Canadian Solar remains a point of debate.
While Collins Stewart sees the first quarter outlook for Canadian Solar as being unaffected by pricing, Auriga Securities last week came out with
a negative view of Canadian Solar's margin profile in the first quarter also, saying that Canadian Solar will report gross margins of 14%, versus a Street expectation of 16% gross margins.
Both Collins Stewart and Auriga Securities are in agreement that foreign exchange losses related to the deterioration of the euro will also hit Canadian Solar hard. Collins Stewart's Monday downgrade did not specifically factor in the foreign exchange loss, though, because the analyst had already adjusted the CSIQ price target based on forex exposure in February.
Shares of Canadian Solar were down close to 8% early on Monday afternoon and trading had already surpassed Canadian Solar's average daily trading volume of two million shares.
While cell pricing stability that may hurt Canadian Solar by the second quarter, in the opinion Collins Stewart, it should benefit JA Solar as a large supplier of cells. However, Collins Stewart is not adjusting its view of JA Solar, currently at hold, because the analyst remains unconvinced that cell pricing will hold into the third quarter of 2010.
Wafer pricing stability was also highlighted by Collins Stewart as better-than-expected in the first half of 2010.
MEMC Electronic Materials
was also subject of a downgrade on Monday morning. While the MEMC downgrade from Hapoalim Securities was related to an over-aggressive margin outlook from the Street, it was not specifically tied to wafer pricing trends. Hapoalim Securities analyst Gordon Johnson believes that the Street is giving too much credit to MEMC for margins to be derived from its system business, SunEdison.
MEMC has been one of the biggest rally stocks in solar year-to-date. While most of the solar stocks trended down from mid-January to mid-March before heading back up again in recent weeks, MEMC has been gaining for most of the year. MEMC started 2010 trading at $13.62 and last week, MEMC shares reached $16.82.
On Monday, MEMC shares were down by close to 7%, with a loss over $1 to a share price of $15.15 in the early afternoon. MEMC trading reached its average daily volume of over 6 million shares traded by the early afternoon on Monday, too.
The Canadian Solar and MEMC downgrades both raised questions as to whether the recent rally in solar shares has become a little too frothy. The demand outlook is better than anyone would have ever expected, led by Germany, and that trend rightfully led solar shares up, but have solar companies been set up for earnings disappointments as a result of the outlook turning so positive in such a short period of time?
Collins Stewart doesn't think so, at least as far as the first quarter is concerned. Auriga Securities thinks the first quarter will be a disappointment for many solar investors.
While Auriga seems to be in a minority position in terms of having a negative view of first quarter earnings for several solar stocks, larger concerns about the extent of the recent rally in solar shares seemed to be winning out, and weighing on solar shares, on Monday.
A general tech sector selloff was intensified in solar as investors sought to separate out the bullishness on solar driven by German demand, from fears that the huge demand in Germany might intensify the pressure on Germany politicians to cut support for solar, and possibly, create unrealistic expectations for the second half of 2010.
The downgrades sent both Canadian Solar and MEMC down, while the only notable upgrade in the sector -- of JA Solar to a buy at ThinkEquity -- was not helping JA Solar shares to avoid a down day. JA Solar was down more than 3% in Monday afternoon trading.
Collins Stewart stated in its Monday solar report that German politicians were already aware of the December record 1.4 gigawatts in Germany before the data was published. In fact, the Collins Stewart analyst thinks that when Germany's environment minister first came out in January with a hard line against solar, it was because he already knew about the level of solar being installed in Germany. For this reason, the Collins Stewart analyst doesn't think the publishing of the December data from Germany will change the political outlook in Germany.
Wall Street Journal
may have stoked fears on Monday that the Germany demand could turn into a negative for solar. The
referred to the huge demand in Germany that has helped solar companies like
, but made the argument that the huge demand in Germany could mean, in turn, that 2010 demand forecasts are way too bullish.
After the recent rally in solar shares, some short-term money may be coming off the table ahead of the earnings season, too.
First Solar shares were down on Monday 2%, the second-consecutive trading day loss for First Solar, from a high on Friday above $137 to $131 on Monday afternoon.
Trina Solar was down close to 5% for the largest loss in the sector not related to a downgrade, and all the solar shares were sliding on Monday. Trina shares had reached above $27 last Thursday, Trina's highest share price since January.
All the Chinese solar companies were down on Monday.
-- Reported by Eric Rosenbaum in New York.
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