NEW YORK (
) -- It was U.S. solar inverter company
( SATC) turn to feel some pain related to Italy during Tuesday trading. Shares of SatCon were down close to 8%, a day after solar inverter company
took a big hit on fears that Italy will cap its solar market in 2011.
It has been a difficult earnings season for the solar inverter companies. Each company, from SatCon to Power-One and
Advanced Energy Industries
, has sold off on company-specific issues in the 2011 outlook. Now solar industry-wide fears about the boom market of Italy going bust have compounded the weakness in inverter stocks. "All the inverter guys had a disappointing outlook and this is one more reason to be negative," said Cantor Fitzgerald analyst Dale Pfau.
In the case of Power-One, down more than 10% in the past two days, the Italy issue presents the most business-specific risk. Power-One is a major player in the Italian market.
For SatCon and Advanced Energy Industries, Europe is a much smaller part of the business mix -- but Europe is
the mix, and that's what seemed to be hitting shares of SatCon. Advanced Energy Industries was down close to 2% on Tuesday, but it was only SatCon that experienced a steep decline in share value.
For SatCon, the business focus is on the U.S. and China, and what's more, on the inverter market for large-scale utility projects.
Analysts who cover the inverter company said there were no other issues that could explain the tanking in SatCon shares.
"People associate risk in Italy with Power-One, and it has the biggest percentage of sales there, but people seem to forget that SatCon has European sales. Today the negative trade is SatCon on the Italy headline risk and tomorrow it could be Advanced Energy Industries. There's nothing company-specific right now," said Carter Driscoll, analyst at Capstone Investments. Both SatCon and Advanced Energy Industries sold off after earnings, as did Power-One.
SatCon's exposure in Italy has not been its big European market exposure. As of the end of the third quarter of 2010, the Czech Republic represented $19 million of $58 million in revenue, and France was the next biggest European country at $2.9 million. The same focus on the Czech Republic was reflected in the recent Advanced Energy Industries earnings.
SatCon didn't even break out Italy as a separate market at the end of the third quarter 2010, but with the Czech Republic putting a hard stop on solar growth, and France making big cuts to its solar incentive program, Italy is expected to be the big market for the solar industry, and Italy has had a focus on larger-scale as opposed to rooftop projects, also.
"It all has to do with issues concerning Italy, and SatCon has been picking up business in Italy," said Dale Pfau analyst at Cantor Fitzgerald.
"It's going to be a headline risk for a while," said Capstone's Driscoll.
If analysts including Cantor Fitzgerald's Pfau and Capstone's Driscoll see a clear trading link between the negative sentiment about Italy and all solar stocks including inverter stocks, they believe in the case of SatCon the reaction may be overdone.
Cantor Fitzgerald's Pfau says that if Italy does put a cap in place on solar installations at 8 gigawatts, as it is debating, the impact will be felt throughout the solar sector, but it doesn't change his argument that the inverter space is fundamentally different from the solar module market. "I continue to believe Power-One and SatCon will do better than the panel guys," Pfau said.
The Cantor Fitzgerald analyst predicates his support for SatCon on a few key factors:
There are only a handful of companies making inverters for the utility-scale project market.
Solar subsidies have to come down and that's a negative for every solar company, but the inverter companies, especially those like SatCon focused on the utility market, experience less specific pricing pressure.
Margins will come down in the inverter space, but that's a bigger issue for inverter companies that have been focused on higher margin residential and small commercial projects, like Germany's SMA Solar and Power-One, as opposed to SatCon. The shift to the central inverter market means lower margins, but the central inverter market is SatCon's core market.
Capstone's Driscoll added that inverter companies don't need to run operations at 100% or near-100% factory utilization to be profitable, which is another difference between inverter players and solar module makers in a slowing growth market.
Raymond James analysis of the inverter market also notes that Satcon is in the utility-grade (100+ KW) market, which is less commoditized and more IP-centric, so there's some degree of protection there. Raymond James also notes that SatCon said on its recent earnings call that the demand for the utility market is looking solid for the rest of 2011 -- 52% of SatCon backlog is in North America.
Yet Raymond James also noted in an email to
that if European demand slows more than expected, all of the competition in the inverter space shifts even more so to SatCon's core market. "It's still easy enough to ship those inverters in Europe to North America, where they would inevitably compete with Satcon. At the end of the day, inverters are fungible assets and if there's a supply glut in Europe eventually they should be sent where the demand is," Raymond James wrote.
Ultimately, it's just one more volatile day for solar stocks, with trading multiples being reined in based on subsidy risk in Europe. "These are trading vehicles and the stock price on any given day is set by less than 2% of shares," notes Cantor's Pfau.
-- Written by Eric Rosenbaum from New York.
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