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Is the Solar Pricing Squeeze Just Ahead?

JA Solar sells off after it raises shipment guidance for the year, leading to questions about the accuracy of the solar outlook for 2011.

(JA Solar story updated for commentary on 2011, and Q-Cells outlook.)



) -- Solar stocks have -- so far -- defied the fears of a sudden drop in solar prices after the July 1 German feed-in tariff reductions. Solar stocks sold off on Tuesday and Wednesday nonetheless, and after the revenue miss from

Cisco Systems

in the after-hours earnings on Wednesday, the overseas markets were at best flat on Thursday and the U.S. markets opened lower. JA Solar, in particular, while raising its full year shipment guidance and exceeding Street consensus on second quarter revenue, saw its shares dive in Tuesday and Wednesday trading.

>>JA Solar EPS at Odds With Outlook

There could, of course, be any one among a number of immediate reasons for the solar sell-off and adverse reaction to the JA Solar earnings.

Solar stocks attract the most short-term minded of investors. Most of the solar stocks ran up last week, presenting a quick opportunity to get in and out of stocks.

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Macroeconomic fears also weighed heavily on stocks on Tuesday and Wednesday, with the Federal Reserve decision on interest rates spooking investors about recovery. The Fed, citing slowing economic growth, announced on Tuesday afternoon that it would invest mortgage proceeds in long-term Treasuries, the central bank's first economic stimulus effort in a year. The Fed move was not a surprise, with PIMCO CEO Mohammed El-Arian recently telling


that there was still a one-in-four chance of a double dip recession and many market prognosticators thinking that recovery, at best, was slowing.

The solar sector offers its own divergence of opinion when it comes to betting on a modest growth trajectory or a big rebound continuing into 2011. A third potential reason for the solar sell-off would be belief that pricing pressure is right around the corner for solar stocks.

Paul Leming, analyst at Soleil Securities, wrote in a research note on Tuesday, "It is becoming clear that volumes will not slow in the third quarter (following the July 1 reduction in feed-in-tariffs), and product pricing will remain relatively stable throughout the PV value chain (a sharp improvement over expectations from just two to three months ago)."

The Soleil analyst's comments accurately reflect the short-term outlook, but Leming has also always been in the camp of those who think demand visibility in solar is myopic.

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The JA Solar management team, for its part, said visibility looked strong into 2011, "with customers already placing orders and requesting volume commitments."

Yet JA Solar shares sold off. JA Solar's earnings per share miss included charges stemming from a bankrupt polysilicon provider and a decline in the value of derivatives contracts.

Jefferies increased its price target on JA Solar after the earnings from $8 to $10, arguing that the earnings charges obscured the larger message. Jefferies analyst Jesse Pichel pounded the table after the JA Solar selloff, writing in a JA Solar earnings wrap that, "JASO management stated several times on the conference call that 2011 demand is well in excess of its 1.8 GW cell capacity (raised from 1.5 GW) and that it does not need any additional customers to sell out its 500 MW of planned white label module capacity in 2011."

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So why the JA Solar selloff? Taking a stab at the negative turn in JA Solar sentiment, the Jefferies analyst speculated that investors may remain cautious around industry volume and price trends in 2011, given the 2010 demand pull-in and 2011 FIT reductions in Germany -- which gets back to the fundamental argument over the solar outlook. These fears, combined with high expectations for the second quarter, mean that anything less than a clean earnings report ... and solar shares will sell off.

First Solar

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beat the Street earnings estimate again this quarter, but its sober outlook about the coming year helped to send its shares lower after earnings.

Another JA Solar watcher who couldn't be quoted because he doesn't have active coverage of the stock, said that it's the players in the middle that always get squeezed first. It has long been a knock on JA Solar that its core solar cell business feels the pricing pinch before other points on the solar supply chain, including modules. The price increases that solar companies are hoping to pass along as feed-in tariffs decline may be easier said than done.

More fuel was added to the never-ending solar sector fire about the 2011 supply-demand dynamic with commentary from



and Germany solar company

Phoenix Solar


SunPower said in its earnings conference call late on Tuesday that the solar market could be transitioning from a seller's market to a buyer's market next year. SunPower could have its own self-serving reasons for making such a claim, with the argument that it will outperform peers that get smacked by a pricing crash with its strategy of providing comprehensive services to the dealer market and its growing focus on the systems business into which it can feed its own modules.

Phoenix Solar CEO Andreas Haenel said concurrent with the German solar leader's Wednesday earnings that prices and demand for solar cells and modules were likely to fall next year. "Last year was a horrific year for the sector. But I think it is necessary that prices will fall further next year," Haenel said on Wednesday's earnings call.

Phoenix Solar second quarter revenue handily beat the Street, but its shares were down as a result of its commentary about weak demand.

The same story was repeated in quarterly results from Germany's largest solar module maker,


on Thursday. Q-Cells reported its first quarterly profit since 2008, buoyed by the high demand in Germany ahead of the feed-in tariff reductions, provided an improved outlook for the full year 2010, but expressed a less than rosy view of the coming year. "I believe that 2010 was a year of extraordinary growth. But will we see the same situation in 2011? I don't think so," Q-Cells CEO Nedim Cen said when discussing the earnings.

Of course, the lack of powers of prediction in solar, when it comes to pricing and supply, work both ways. At the beginning of 2010, the bears were winning the argument that prices would drop dramatically in the second half of the year. Demand turned out to exceed all reasonable expectations and the pricing environment for the second half of 2010 appears stable. The industry tone can be as wrong when it is tilting to the negative as it has been at other junctures in the past when it was overly confident. Uncertainty about 2011 is having an impact again, but the solar sector's track record in forecasting even three months out is less than stellar.

Still, few who monitor the solar sector have doubts about some level of a pricing decline next year. It's just a matter of how much pricing deteriorates. With sold out conditions in solar right now, most expect pricing to be stable in the third quarter. It's beyond the next quarter, and the order of magnitude of potential oversupply in 2011, that is fueling the debate.

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The entire solar sector was took heavy losses on Wednesday, led by the biggest recent gainer in the sector,

Solarfun Power


. JA Solar was again suffering a big losing day on Wednesday, down another 8%. It was another tough day for the markets, and with the Nasdaq 100 down close to 3% at midday on Wednesday, big solar losses are almost a foregone conclusion based on historical trading patterns.

In typical solar fashion, the solar stocks that had gained the most over the past month sold off the most when the markets took a nosedive.

JA Solar also forecast gross margin in the range of 20%, clearly lower than its first- and second-quarter gross margin levels at 23%. However, JA Solar guided to 20% in both of the past two quarters also.

Some argue the even a JA Solar bull case indicates a share price around $6, but JA Solar shares were even lower after its two-day decline, at $5.50.

For JA Solar, it ultimately comes down to whether the Chinese solar company can increase market share in a slowing growth market. The Jefferies analyst conceded as much, writing that market growth may be more muted in 2011, but that this bodes well for JA Solar, in his opinion, as well as other low-cost Chinese players, like

Solarfun Power



JASO management forecast average sales prices increasing in the third quarter, remaining flat in the fourth quarter, and decreasing in the first quarter of 2011, though staying well above prior expectations.

The Jefferies analyst predicted that a solar demand visibility rally might occur in the October timeframe. Still, the general thesis that a lower price environment bodes well for the Chinese solar stocks has been the bull case for solar stocks for more than a year now, and supports a bullish view on JA Solar, Solarfun and the module makers like

Trina Solar



Yingli Green Energy



Jinko Solar

(JKS) - Get JinkoSolar Holding Co. Ltd. Report


On Tuesday and Wednesday, it seemed at least some solar investors weren't willing to wait until the fall to make the call on solar demand that might back up the general thesis about the JA Solar outlook. More than 14 million shares of JA Solar were traded on Tuesday -- more than twice its average daily volume of shares.

JA Solar has been among the biggest outperformers among solar companies in 2010 when it comes to earnings rally time, but that momentum ended on Tuesday.

Was it just the EPS headline miss by JA Solar providing a convenient profit-taking moment, or a momentum swing compounded by the macroeconomic weakness? Or, did the reaction to the JA Solar earnings provide a solar sector "tell"?

Solarfun has been the big earnings rally stock in this round of solar earnings reports. Jinko Solar will report next Monday morning. Trina Solar and Yingli don't report until August 24 and August 19, respectively.

Jinko Solar shares have been steadily rising for the past month, while Trina Solar shares have also trended up. That hasn't been the case with Yingli Solar.

Indeed, the Tuesday and Wednesday sell-off in solar stocks raises the question,

Did the JA Solar earnings report instruct the wise investor to book profits in solar?

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-- Written by Eric Rosenbaum in New York.


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