Solar Winners: First Solar, Trina, Yingli

NEW YORK ( TheStreet) - The question for solar investors on Thursday is whether a sustainable rally for the volatile sector has begun.

There was positive news for three of the biggest companies in the space, sending shares across solar higher on heavier than usual volume.

First Solar ( FSLR) secured three loan guarantees from the Department of Energy for large-scale solar projects, totaling $4.5 billion. The uncertainty surrounding the loan guarantees has been an overhang for First Solar shares, and the positive outcome to the funding issue sent the stock more than 6% higher on Thursday to $137.59 with midday volume of 4.2 million more than double the issue's daily average.

Thursday's move puts the stock up nearly 15% this week, as the shares had rallied somewhat on the expectation that a decision from the DOE was imminent. Short-covering may also be a factor as recent market chatter has been it's not even possible to borrow First Solar shares.

Meanwhile, two of the largest Chinese solar module makers took strides in meeting their second-half shipment goals for 2011, which has been a major bone of contention between analysts, investors and the companies. Many analysts expect that solar companies will have to revise full-year shipment guidance, as European markets have slowed, and the first half of 2011 presented an inventory glut in the sector.

Yingli Green Energy ( YGE) won a 110 megawatt contract with Huanghe Hydropower, a subsidiary of China Power Investment Corporation, with the modules to be delivered in July and August. Collins Stewart upped its Yingli Green Energy price target to $11 from $10 on the news, with the longer-term opportunity in China in view.

Trina Solar ( TSL) won a 55MW deal with Renault, and also won a 36MW deal with SAG Solarstrom.

The 100MW range is significant for both Trina and Yingli. Both Trina and Yingli are targeting 1.75 gigawatts of shipments in 2011, so these announcements represent 5% to 6% of shipment guidance. In terms of the deliveries for the second half of the year, the deals represent 10% to 12% of shipments.

These deals, though, are not incremental to consensus estimates. Rather, they are a step toward meeting the guidance that the companies have already offered, and of which investors have been skeptical. The same is true in the case of First Solar. Receiving the loan guarantees is implicit in the company's guidance and estimates, rather than the loan guarantees representing new large-scale solar project business won by the company.

In the case of the Yingli deal, it's not just the shipment but the fact that it's a Chinese deal. China is a wildcard in terms of how quickly it will grow as a market for solar installations, though along with the United States, it is seen as a key to solar demand remaining strong and making up for a slower pace of installations in Europe. Collins Stewart analyst Dan Ries wrote in his Yingli report that Yingli is the best positioned company for growth if China starts to accelerate its solar deployment.

Collins Stewart estimates that China will consume 800MW of modules in 2011 and for this volume to rise to 1.6GW in 2012.

"If the government chooses, it can exceed that 1.6GW figure by a wide margin," Ries writes. "China has great potential for solar module demand, but its central government has taken rather lengthy process in setting prices encouraging volume. These announcements, particularly the 110MW agreement with Huanghe Hydropower...could be an indication that the China market is starting to move."

Another factor to consider is pricing throughout the solar supply chain. While these deals bolster the Chinese solar companies' ability to meet shipment guidance, pricing is another big variable, implying that there is still earnings risk.

Pricing has been falling rapidly in the solar sector after the inventory glut, with modules not even being able to find buyers at $1.45/watt, after having been as high as $1.80/watt at the beginning of the year. The most dire forecast for solar pricing predicts pricing will fall to $1 by the fourth quarter or first quarter 2012.

Aaron Chew, an analyst at Maxim Group, summed up the solar rally by noting that it's a sector that has always traded on sentiment. Macroeconomic sentiment has been high, solar stocks are high beta plays, and on Thursday, there was positive news specific to the sector to add to the recent bounce in solar stocks. Solar stocks have also been heavily shorted over the past few months.

"My take there is no need for an academic exercise trying to find a connection between incremental earnings confidence and market cap gains. It's more generally positive sentiment in solar with two of the largest players locking up 10%+ of their 2H11 volumes and FSLR landing $4.5 billion in loan guarantees. With the high short interest, there's no need to be precise about this ping-pong madness."

Yingli Green Energy shares were up by 7% on Thursday.

Trina Solar shares rose by 3.5%, which was a typical gain in the solar sector on Thursday.

-- Written by Eric Rosenbaum from New York.

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>To contact the writer of this article, click here: Eric Rosenbaum.

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