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The Solar Earnings Winner Will Be...?

Earnings season in the volatile solar energy sector has already provided surprises. Which solar energy stock is poised to deliver the biggest positive earnings shock to its share price?

(Solar earnings preview article updated from April 22 with additional analysis, news of changes in German feed-in tariff forecasts, stock news in the sector, and news of the Sunpower earnings report.)

NEW YORK (

TheStreet

) -- Solar earnings season is known for its surprises, and solar investors didn't even have to wait for the first solar earnings report for the sector to make good on that historical norm.

The early earnings surprises have mirrored the typical volatility in the solar sector, and the daily swings in solar share prices.

JA Solar

(JASO)

revised its shipment guidance for the first quarter early this month, and a solar sector rally took off with the good news from JA Solar, the major solar cell manufacturer. Revised shipment guidance from JA Solar was a surprise that maybe should not have been a surprise -- the Chinese solar company had revised its fourth quarter 2009 shipment guidance, too.

The biggest negative earnings surprise to be issued yet came courtesy of

Canadian Solar

(CSIQ) - Get Canadian Solar Inc. Report

which said last week that its gross margins would not meet Street expectations, as

foreign exchange losses cut into Canadian Solar's first quarter execution.

Canadian Solar shares have not recovered since, sliding from a share price above $21 to below $17 at the close on Tuesday.

The currency crisis at Canadian Solar seems to have spooked many solar investors. Are foreign exchange losses stemming from the euro's first quarter slide slated to be the solar earnings season rally killer?

Maybe so, maybe not; it's more the fact that there will be surprises like the Canadian Solar surprise that always seem to roil the best-laid expectations come the actual solar earnings reports.

Will better than expected demand, led by Germany, result in solar wafer and cell pricing that cuts into the margin levels of module makers, if the module makers were forced to buy more third-party wafers and cells than anticipated to keep up with the demand? Some analysts think that issue won't be a negative for solar companies until the second quarter results. Regardless, it's another potential surprise-maker headed into the solar earnings season.

The solar energy stock earnings season kicks off on Wednesday when

First Solar

(FSLR) - Get First Solar, Inc. Report

will report after the market close.

The general expectation is for a relatively good first quarter earnings season from the solar energy companies. The demand outlook has improved considerably from where it was at the beginning of the year, and the worst-case scenario of feed-in tariff cuts in Germany taking effect as early as April didn't come true.

German politicians are hammering out their modifications to the feed-in tariffs right now, and the latest news is that the changes will go forward as planned -- a 16% cut in rooftop solar; a 15% cut in open field solar; an 11% cut in open field solar on contaminated land; and an elimination of feed-in tariffs on agricultural land.

With Germany coming to the end of its long feed-in tariff revision process, the huge uncertainty with which 2010 began has been removed. Still, the uncertainty related to the impact of the German feed-in tariffs on average sales price in the second half of 2010 will be as big an item in this earnings season as it was in the fourth quarter conference calls with solar management.

The fourth quarter was a pretty good quarter for solar companies, too, but that didn't translate into a solar energy sector rally, even on positive earnings news. The prime example was

Trina Solar

(TSL)

, which reported record gross margins in the fourth quarter, and yet was pummeled by investors after its fourth quarter earnings report for indicating that it could not sustain those record gross margins in the first quarter of 2010.

The Street bulls say

Trina Solar was just being conservative in it guidance and would outperform in gross margin. The proof, or lack thereof, is soon to come.

The under-pressure U.S. solar energy players continued to feel the earnings season pressure in the fourth quarter, and the gross margin hawks will be watching over the reports from First Solar and

TheStreet Recommends

SunPower

(SPWRA)

again.

As the big U.S. solar companies transition more module sales to large-scale utility projects, the Street and investors are still trying to make sense of the evolving margin profile and the specific time lines for these project pipelines. It's more a matter of the visibility in the second half of the 2010 for First Solar and SunPower, than it is about the first quarter earnings.

SunPower told investors to expect a break even first quarter, so the Street is not expecting much of a surprise there. First Solar has said that the lion's share of its systems business will be in the second half of 2010, and so, analysts and investors will be looking for signals on how the systems business is shaping up, and modeling out.

None of the big solar companies, whether U.S. or Chinese, really popped after fourth quarter earnings, with the exception of JA Solar.

Suntech Power

(STP)

also delivered the gross margin improvement that the Street has been asking for in the fourth quarter, and had one of the better fourth quarter earnings rallies in the sector.

All in all, though, the trading in most of the solar shares was down immediately after fourth quarter earnings, and that was a bit of a surprise given the bullishness that dominated headed into the year-end reports.

Yingli Green Energy

(YGE)

really disappointed investors in the last earnings go around, and its shares have lost a third of their value year-to-date.

We're at the same point again. The first quarter is roundly expected to be a good quarter for solar, as Germany's insatiable appetite for solar installations ahead of the feed-in tariff cuts continues to drive demand.

Earnings in solar may look healthy, even if it's part of the same boom and bust, up and down earnings cycle in solar that has been a long-time knock on the sector, or a "frenemy", as one analyst recently dubbed the "demand elasticity" in the sector.

Shipment guidance is likely to meet if not exceed expectations for many solar energy companies, but record shipment can't alone spur a solar stock rally, or even serve as proof of a solar company cost structure making the grade.

Case in point:

Evergreen Solar

(ESLR)

announced record shipment levels for the first quarter this week, but that didn't translate into any gross margin improvement.

The actual solar earnings data noise starts on Wednesday after the market close with the first earnings report, from First Solar.

Which solar firm do you think will manage to rise above the noise and convince the Street that its first quarter earnings should serve as a rally trigger?

-- Reported by Eric Rosenbaum in New York.

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