First Solar, Evergreen Solar: What You Need to Know

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Shares of First Solar ( FSLR) are off roughly 20% today Feb. 25 to around $110. It could have been worse: Some analysts slashed their price targets down to the $60 to $90 range on the heels of a more cautious management outlook for 2009.

Shares do indeed look vulnerable to further selling, as the next few quarters could prove to be a bit scary. But shares are unlikely to reach those most bearish targets, as the company's brighter longer-term outlook is likely to lure buying support if the stock breaches the $100 mark.

Most importantly, as I'll note in a bit, the outlook for smaller, more poorly capitalized rivals could really get hammered in coming quarters.

At first glance, First Solar's quarterly report was quite impressive. Fourth-quarter sales rose 24% sequentially to $434 million, and full-year sales rose more than 140% to $1.25 billion. The $132 million in quarterly profits made a strong cash balance even more impressive, rising to $852 million. Most rivals are far less flush, and those that hope to raise money to keep going in 2009 may be out of luck.

First Solar also broke the magical $1 mark in terms of costs per watt. That's an industry first, and it keeps the company well below its peers that rely on polysilicon. In fact, management says that metric could fall to 65 cents in a few years, which implies that we are moving closer to the day when solar power can effectively compete with fossil fuels without the support of subsidies.

That's the good news. The bad news: The current year is shaping up to be pretty lousy. Customers are having a hard time borrowing money for projects, rivals are benefiting from sharp drops in polysilicon prices (spot prices have fallen from a peak of about $450/kg in mid-2008 to below $150 kg), and the industry continues to overproduce, thanks to capex decisions made a year or two ago.

First Solar, for example, is expected to double production of solar panels to the equivalent of more than one gigawatt of panels (the equivalent output of a nuclear power plant). Management concedes that demand may not keep up with supply: "We regard oversupply as a risk that we need to continue to monitor very closely," said CEO Michael Ahearn. It seems almost inevitable that FSLR and its peers will be posting fast-rising inventories over the next few quarters, and that is not likely to sit well with investors.

And oversupply means even tougher pricing. First Solar can handle that, even if 50%-plus gross margins and 15% operating margins need to take a hit in the near term. But what about the peers that are also flooding the market. Can they afford a price war?

Evergreen Solar ( ESLR) just posted a $52 million quarterly loss on skimpy 4.6% gross margins. What do gross margins look like when end-user pricing will be falling at a fast clip?

Suntech Power ( STP) just reported 0% gross margins and has tapped more than $1 billion in credit lines to meet funding needs. In short, this is not a business model that is prepared to handle a pricing shakeout.

In addition, even for those companies that have enough cash to weather the near-term downturn, profit forecasts still look far too high. For example, JA Solar ( JASO) is expected to lose money in the December 2008 and March 2009 quarters, but it's hard to see how the company can post a sharp rebound in profits for the rest of 2009, as the consensus forecast seems to imply.

In fact, almost all industry forecasts seem to be counting on a significant boost from U.S. government policies in 2009. But even if the Obama administration doles out more goodies beyond the recently-announced investment tax credits, any major new projects are unlikely to hit P&Ls before 2010.

For the longer term, it does appear that the U.S. and other governments will be providing material economic incentives to solar, as they strive to meet renewable portfolio standards (RPS). But before that happens, the industry could look pretty bleak for the next few quarters -- at least.


Know What You Own: Other solar stocks include LDK Solar ( LDK) and Solarfun Power Holdings ( SOLF).

This was originally published on RealMoney on Feb. 25, 2009. For more information about subscribing to RealMoney, please click here.

David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.

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