First Solar Stumbles
February 25, 2009 10:13 AM ET | Kirk Shinkle
First Solar, the thin film solar panel maker considered by many to be the best name in solar stocks, can't escape the realities of the economy and credit markets. That's the message this morning after the Tempe, Ariz.-based company's earnings report, which included some generally healthy guidance tempered by some dire comments from CEO Mike Ahearn. Shares are off 19 percent this morning as analysts slash their ratings and price targets on the company after Ahearn said on the earnings call that "the short-term outlook for the solar industry in our view has never looked more difficult.“
A quick roundup: S&P cut the stock to "hold" from "buy." Canaccord Adams, Citigroup, FBR Research cut price targets. ThinkEquity slapped a "sell" rating on the stock. And remember, this is after the company blew past expectations for fourth-quarter earnings!
So what's happening? The answer is a combination of expectations for the sector that were simply too high and the realization too late that the credit crisis is absolutely hammering investment in the solar sector. It's also the story of the messy rise of a young industry that got caught in one of the worst downturns in recent memory. Broadly, investors spent several years pouring money into the sector that hadn't produced much in the way of profits, clear sector leadership, or the ability to sustain growth without the help of a friendly investor base and favorable government subsidies.
Ahearn deserves credit for being up front regarding the industries troubles. From the transcript of the earnings call (via Seeking Alpha) he outlines why the situation has become so difficult:
Equity financing in solar projects ranging from building owners that purchase systems for their rooftops to institutional project investors is continuing but its become less predictable and in some cases more expensive than before the crisis ensued. In particular, we’re seeing larger, more sophisticated investors take an opportunistic approach to maximizing investor returns and this is causing them to compare solar project returns to other investment alternatives that provide higher yields and/or better liquidity.
As a result of these dynamics, a couple of things are happening to the fundamentals of the business model. Project pipelines are more uncertain than before, both in terms of realization and timing, which makes short-term results less predictable. And as stated in our last call, project finance costs are higher than before, putting downward pressure on its [goal] systems and module prices.
These conditions are pressuring the entire solar value chain, equipment suppliers, module manufacturers, as well as project developers, system integrators and distributors and as an example we mentioned on our last earnings call that although First Solar generally enjoyed a strong customer base, we consider a small number of our customers to be under financial stress. We currently believe the potential customer defaults translate to roughly 10 to 15% of 2009 volumes.
Basically, even though the government stimulus package included grants worth up to 30 percent of a projects cost, that still leaves the other 70 percent that has to be financed. Right now, that's still a looming uncertainty for lots of investor who formerly flocked to the solar space. As Ahearn mentions, there's little clarity on when institutional investors will again favor the sector.
Then there's a fundamental supply and demand imbalance that is rapidly becoming a big problem for the entire solar sector.
Ted Sullivan, an analyst at Lux Research has repeatedly warned there's a shakeout on the way. This year, falling demand, falling prices and a lack of access to financing are becoming frighteningly real. In a recent report, Sullivan the 2009 solar market dipping to $29 billion from $36 billion in 2008. One big cause is overcapacity among solar panel makers, which ramped up production in hopes of a continual jump in demand, are now faced with a glut of product on the market. That oversupply also means prices are falling, with customers like large utilities paying $2.50-$3.10/W vs. $3.80/W when silicon prices and a scarcity of modules conspired to boost the industry last year. He says cell and module capacity "will overshoot demand by twofold in 2009" causing "a shakeout that will eliminate all but the top players" before the industry rebounds.
The good news is Sullivan predicts the market will grow to $70 billion in 2013. Today that seems like a very long way off for First Solar and its weaker rivals.