Solar Losers: Guidance Revisions Begin

NEW YORK ( TheStreet) -- Pre-announcement season picked up steam in the solar sector on Tuesday, with two solar inverter companies and one polysilicon company saying they wouldn't meet previous earnings guidance.

While many solar stocks have fallen to levels that some solar experts consider "trough" values, the risk of guidance revisions and a weak third-quarter outlook remains an overhang on the sector, coupled with a lack of positive catalysts for shares.

The most significant pre-announcement came from U.S. solar inverter company SatCon ( SATC). SatCon didn't only lower its second-quarter revenue guidance to a range of $45 million to $47 million (down from $50 million to $60 million), but showed significant balance sheet vulnerability, slashing its work force by 15% and issuing $16 million in convertible debt to an institutional investor.

SatCon's peer inverter company Advanced Energy Industries ( AEIS) also revised its second-quarter revenue guidance to a range of $137 million to $140 million, below the range of $148 million to $160 million previously provided by the company. AEIS said that earnings would be at the low end of or slightly lower than the previous guidance of 36 cents to 44 cents a share.

SatCon shares declined by 23% on heavy volume on Tuesday, while AEIS shares declined by 12.4%.

Power-One ( PWER), the largest of the three U.S.-based solar inverter companies, was down 6.7% on the news from its peers, though it hasn't revised its guidance of revenue of $250 million to $270 million.

The SatCon and Advanced Energy Industries revisions are relevant to Power-One in several respects. First, while SatCon and AEIS are more focused on the U.S. solar market than Europe, where Power-One is a dominant player, European market weakness was cited in the guidance revisions. Second, Power-One has been focusing on its U.S. sales effort as a buffer against declines in the European market. The solar inverter company revisions suggest that the second-quarter conditions in the U.S. were less robust than expected. Finally, the solar inverter market has been working through an inventory glut in the first half of the year, and SatCon cited this glut in projecting an earnings miss.

Solar inverter companies often make the argument that they are insulated from the pricing pressure that exists at other points in the solar supply chain. Power-One also notes that its pricing has been lower than competitors to begin with, alleviating the need to slash pricing. However, when an entire market is not buying solar modules because it expects further price declines, and financing and permitting delays continue, it has a larger impact on the inverter market than any relative pricing strength.

In slashing its gross margin guidance for the second quarter to a range of 7% to 11% (down from 17% to 20%), SatCon cited the slowdown in the European market, excess inventory, and a problem associated with a major project in North America.

"We anticipated Q2 to be a transitional quarter and have taken on the appropriate measures to ensure that we achieve profitability," said Steve Rhoades, Satcon's CEO, in a release.

AEIS said in a release that its results were primarily impacted by changing solar market conditions driven by panel price declines, short lead-times for components, and permitting and financing delays.

"These trends are causing some customers to push out purchases until panel prices stabilize, leading to the postponement of construction of their projects," AEIS said.

The financing delays and permitting delays could apply equally to a European market, such as Italy, or the U.S. China, where Power-One and all of the major solar players are looking for growth, was also cited as having a slower-than-expected ramp.

Carter Driscoll, analyst at Capstone Investments, said the multi-faceted nature of the SatCon commentary implied that the second quarter will be tough across the board for solar companies. That's no surprise, and the analyst said it may already be a factor priced into Power-One shares. However, Driscoll said even if Power-One doesn't revise its current guidance, there is risk in their upcoming earnings.

"Power-One might not miss by enough for a pre-announcement, but come in at the low end or just below the guidance. That might be baked into shares already, but their commentary on the second half of the year might be difficult," Driscoll said, adding that he wouldn't be surprised if the higher-end of Power-One full-year guidance was revised lower.

In any event, the more important takeaway is that "inventory is not clearing as fast as expected and there are still issues with bank financing in Italy and the U.S. seems to have had a hiccup this quarter with developers talk about permitting issues," Capstone's Driscoll said. "Customers are waiting for another round of price cuts and that could mean a slower second half recovery," the analyst added. "Weakness in China and Europe and North America shouldn't be shocking. We've had two confessions today."

In fact, there were three concessions on Tuesday, with a polysilicon player out of China, Daqo New Energy ( DQ), joining the inverter companies in revising guidance lower.

Polysilicon had been the only part of the solar supply chain insulated from the rapid price declines. However, pricing has declined from above $80/kg in the fourth quarter of 2010 to spot market prices of roughly $50/kg. Daqo lowered its second-quarter revenue guidance to a range of $70 million to $71 million, down from $92 million to $95 million.

"The polysilicon industry has now entered a period in which excess supply will prevail for at least the next year," wrote Collins Stewart analyst Dan Ries in a negative view of Daqo on Tuesday morning.

Daqo shares declined by 9.7%.

Gabelli fund manager John Segrich recently told TheStreet that polysilicon pricing may fallas low as $25/kg in the next year.

-- 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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