When the stocks were at their peak of fervor in late 2007 I was early calling for a major consolidation to come in this increasingly commoditized business - this was a very unpopular view at the time to the "herd" as solar stocks were money printing machines for investors for much of 2007. [Jan 3, 2008: The Long Term in Solar]
I do have some serious concerns in the 'mid term' (1-4 years)... my thesis is like all mfg goods, especially now heavily based in China, we will have periods of time over the next decade where capacity does not match demand, and even if this holds for a 4-6 quarter period, serious price wars can develop. I outlined this theory in detail in November in [Interesting Survey from Chinese Solar Companies - Price Concerns Already an Issue]
In times like this when speculative juices are flowing in the sector, and even the tiniest of companies get run up 100s of percent it is hard to reconcile these performances with long term logic. The market in the near term is anything but logical. We will have some great shakeouts and many of these no name companies rising 400% I expect to be delisted, acquired for pennies on the dollar in half a decade or just be gone.
Now as I always repeat in these posts about solar, the counter argument is always, solar is 0.000001% of all energy use and will explode over the coming decades. I don't dispute that. My argument is timing. Timing of supply vs demand. It would only take 4-8 quarters where demand and supply are misaligned (way too much supply vs current demand) and this would crush pricing.... many companies will go from printing money to being major losers.
Not only has that been happening but the credit crunch and drop in oil has caused investors to flee. [Feb 6, 2009: NYT - Dark Days for Green Energy] [Dec 20, 2008: BusinessWeek - Clouds Over the Solar Industry] Frankly my largest mistake here was not listening to my theories and going heavily short the group - but again, if you were a few weeks / months early you could easily lose 100% shorting into a mania that was solar circa late 07.
There are many many many! moving parts in this sector not limited to
- Price of polysilicon (major input for most major players)
- Government subsidies
- Awakening of China / America versus established programs in Japan and Western Europe
- Natural gas / coal prices (or "oil" if you want to keep it simple)
- Access to credit for large scale installations
- Thin film technologies versus polysilicon based
- Consumer demand v corporate demand
- Massive growth in Taiwanese and Chinese small to large players with cutthroat competition
- Ability for many of those players in item 8 to stay solvent
- Price points that create equilibrium with conventional energy sources
It really comes down to a marriage of government incentive introductions / expansions, overlaid with improved technology to drive down break even price points, overlaid with a very dramatic increase in commoditization as barriers to entry are low, overlaid with first mover and / or advantages of size / scale.
In this piece I thought I'd focus on the earnings results from Energy Conversion Devices (ENER) which is a unique niche player in the space - but their commentary speaks to the "moving parts" along with a well timed Wall Street Journal piece further down the page. As I read this, it makes the continued outperformance of First Solar (FSLR) all the more remarkable.
- Energy Conversion Devices Inc (ENER) on Monday reported a 81 percent drop in third-quarter profit due to weak demand for solar power in the United States, and the solar company declined to provide outlook for the fourth quarter, citing poor visibility. Net income for the fiscal third quarter ended March 31, 2009 was $1.3 million, or 3 cents per share, compared with $7 million, or 17 cents per share, a year ago.
- Revenue came in at $66 million, compared to $70 million in the third quarter of fiscal 2008. Gross margins on solar product sales for the latest third quarter was 29.2 percent, down slightly from 30.7 percent a year ago.
- Skyrocketing demand for solar power was a bright spot in the global economy last year until a pullback in solar subsidies in Spain and frozen credit markets dried up access to project financing and choked off demand.
- "The global market continues to be difficult, with the biggest challenge being the sufficiency of project financing and our customers' continued access to capital," Chief Executive Mark Morelli said in a statement.
- On a conference call with analysts, Morelli said the company had lower-than-anticipated product sales and higher-than-expected inventory levels at the end of the quarter. Customer access to project financing remained tight and a number of projects were delayed, Morelli added. (that's like the holy grail of bad news - I am shocked the stock is not up 30% based on what is happening in other sectors)
- Raymond James analyst Pavel Molchanov said the fact that the company did not offer any guidance suggested visibility remained bad. "Their news last week further adds to the perception that demand is very, very poor," he said, adding that revenue estimates for the June quarter and for fiscal 2010 will need to come down 'quite considerably'. Raymond James' Molchanov said lower selling, general and administrative (SG&A) expenses helped results. (chop chop chop heads... make the number) For the latest third quarter, the company reported SG&A of $12.3 million. For the second quarter ended December 31, 2009, operating, general and administrative expenses came in at $17.2 million.
- "The reality is that average selling prices are coming down across the board in the industry. So it would be very unlikely for any of these companies or practically anybody in the solar space to see a lot of margin improvement," the analyst said. While ECD declined to disclose its average selling prices, the company said prices came down by low single-digits in the quarter.... it anticipates further declines in ASPs going forward.
- The global recession and tight credit conditions have cast a chill on the solar-power industry after years of breakneck growth, and could usher in long-term changes in the industry. Banks have curtailed financing for major solar projects, and Spain -- the world's second-largest solar-power market after Germany -- has slashed subsidies for the industry, leading to sharply lower demand for solar cells. Sales of the tiny chips that convert the sun's rays into electricity are expected to drop by at least 20% this year.
- As a result, solar-cell manufacturers are delaying construction of new factories and sharply cutting prices. Several big solar companies, including Renewable Energy Corp. of Norway and Q-Cells SE of Germany, have scaled back ambitious profit and revenue goals, and are predicting a tough year ahead. Analysts expects solar cells to fetch an average of just $2 per watt this year, down sharply from $3.95 per watt in 2008. (that's a 50% drop, and you can see how sharply input costs have to drop for producers to have any chance of thriving in this sort of environment) "Last year we couldn't make enough solar cells to keep up with our customers' demands," said Anton Milner, chief executive of Q-Cells, the world's biggest solar-cell manufacturer by volume. "Now it's a buyer's market -- customers are coming back to ask if they can buy lower volumes and have lower prices than planned." "I've gone from managing for rapid growth to managing for cost reductions," said Mr. Milner. (commoditization 101)
- World-wide shipments of solar cells to companies that install rooftop solar-power systems and build fields of solar panels for commercial energy production grew 85% to almost 6,000 megawatts in 2008, according to research firm Collins Stewart LLC. This year shipments are expected to fall to 5,575 megawatts. (so from 85% growth to shrinkage - within 12 months)
- In environmental terms, there may be a silver lining in the industry's woes. The drop in prices for solar-power gear could make solar energy more competitive with burning fossil fuels to generate electricity, even if oil prices stay at around $50 a barrel. (again, even this writer compares solar to OIL - instead of nat gas or coal) Today, less than 1% of the world's electricity comes from solar power. "The dramatic cost reductions now happening in solar will be good for the industry and the environment in the long term," said Sven M. Hansen, chief investment officer of Good Energies LLC, which invests in renewable energy. "But in the short term, the outlook for solar companies has never looked more difficult."
- Utilities and other developers are also finding it harder to get loans or raise investment capital for big solar projects. In the first quarter, global financing for renewable-energy projects fell to €11.5 billion from €20.5 billion in the fourth quarter, says London consulting firm New Energy Finance. (talk about dramatic, that's nearly a 50% drop quarter over quarter - certainly some of this was due to the credit crisis)
- Some industry watchers think the current downturn is more than a bump in the road. Dan Reis, analyst at investment-research firm Collins Stewart, says falling solar-cell prices could herald an era of lower profits and thinner margins. Sales of solar panels will boom in volume terms, Mr. Reis said, but since prices will be much lower, companies with low costs, such as Chinese manufacturers Trina Solar Ltd. and Yingli Green Energy, will have an advantage.
- Even so, solar-cell makers may get some relief as countries including the U.S., Japan and China provide more support for renewable energy either as part of their economic-stimulus plans or to combat global warming. But those subsidies are unlikely to translate into an uptick in solar-cell orders until next year at the earliest.
[Mar 14, 2009: NYT: Europe's Way of Encouraging Solar Power Arrives in U.S.]
[Aug 28, 2008: Energy Conversion Devices Turnaround Story Continues to Have Legs]
[May 8, 2008: Energy Conversion Devices - Is the Turnaround Finally Here?]