Lights Out for U.S. Solar Dogs? (Part 2)

Updated from Wednesday, Feb. 10 (Part 2 of a two-part feature on threats faced by underperforming U.S. solar companies)

NEW YORK ( TheStreet) -- With a few U.S. solar firms reporting extremely weak earnings in the first half of the week, now might be the time to question if some of those might lack the time to become competitive before becoming extinct. Wedbush Securities' analyst Christine Hersey, for one, said all solar investors do need to think about whether the underperforming U.S. solar companies can continue to be going concerns.

Energy Conversion, for its part, has indicated that its pricing premium will completely erode in 2010. And while it may be premature to sound the death knell, the prudent investor will have to pay more attention to how these companies manage their short-term cash.

Energy Conversion has already been in the position of converting cash into inventory and not converting that inventory back into cash sales through the second half of 2009.

The situation may be even more dire for Evergreen Solar. Evergreen's debt-to-total assets ratio is at its highest level in five quarters, and after its earnings on Tuesday, the Evergreen management said that the solar company will have to raise more capital.

Analysts noted that, given its current financial situation, Evergreen would likely not qualify for traditional lending, and as management said it needs a capital raise imminently, Evergreen will likely pursue a secondary equity offering or convertible deal.

Existing shareholders of Evergreen reacted to that news on Wednesday as expected, when shareholders are facing share dilution: Evergreen was down more than 7% and was trading well above its average daily volume -- 5.5 million shares traded versus 3.9 million on an average day.

Evergreen's stock price was at $1.19 on Wednesday afternoon, much lower than its price per watt. At least Evergreen has made progress on reducing something.

Stuart Bush, an analyst at RBC Capital Markets, said that a lot has to go right for Evergreen just for the solar company to operate on a positive-cash flow basis, let alone be profitable enough to pay off the current debt load. Bush noted that at a time when Evergreen has $90 million in the bank, it has $97 million slated for project spending in 2010, two-thirds of that in the year's first half.

At the same time, Evergreen management is planning to increase research and development spending and SG&A. "They've lost credibility in being able to communicate a path to profitability," Bush said.

There are some solar analysts who are already convinced that Evergreen will never be competitive, but Wedbush's Hersey, who maintains an underperform on Evergreen, reminded investors that Evergreen has pulled a rabbit out of its hat before.

Evergreen was previously able to land a joint venture with a Chinese investor that has helped it to pursue a path of producing more solar wafer capacity in U.S. while building out the solar modules and cells capacity in the low-cost Asian market. On the other hand, another Evergreen joint venture in Germany is facing bankruptcy.

What's more, the Evergreen wafer is not a standard size wafer, meaning it has to be handled by a specialty manufacturer in China. Evergreen talked about a technology breakthrough during its earnings call that would allow it to produce its wafer at a standard size, and Wedbush's Hersey said that could be the type of rabbit-from-the-hat that saves Evergreen, allowing the solar company to license the wafers to a wide range of solar cell and module makers.

This kind of technological leap from Evergreen could also make it more attractive as a potential takeout target for larger solar players. However, it is still a technological dream for a solar company that is as cash-strapped as they come, so investors should not bank on it, even while it can't be ruled out.

All of which begs the question: Should solar investors be banking on either Evergreen Solar or Energy Conversion Devices after the latest bleak earnings? Take the poll below to learn the consensus of TheStreet.

Should solar investors be banking on either Evergreen Solar or Energy Conversion Devices after their recent bleak earnings?

Evergreen Solar will be felled; get out if you haven't already.
Energy Conversion Devices is the doomed one.
Both U.S. solar players will be extinct before long.
Both companies will survive.

-- Reported by Eric Rosenbaum in New York.

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