July 6, 2009, 10:39 am
Solar Stocks: Barclays Warns Q2 Results Could Disappoint
Posted by Eric Savitz
After a 70% rally off the March low, it might be time to get more cautious on the solar stocks.
At least, that is the advice this morning from Barclays Capital analyst Vishal Shah. He thinks the recent rally makes the stocks less attractive headed into Q2 earnings season, and advises taking a “selective approach.” In connection with the broader call, he cut price targets on Energy Conversion Devices (ENER), First Solar (FSLR), Suntech (STP) and Yingli (YGE).
The bottom line, Shah writes, is that he sees downside risk to shipments, margins and operating expense assumptions, which could drive valuations lower. He cites the following risk factors for the group:
•Germany concentration risk is increasing, with 50%-75% of shipments to Germany.
•Q3 is likely the peak for industry shipment as the German market is likely to be seasonally weak in Q4 and Q1, while new China and U.S. subsidy programs not likely to offset German market declines.
•Street consensus estimates modeling stable margins through second half and 2010 on lower poly prices; but he says rate of poly price declines are decelerating. He sees ASPs falling faster than cost reductions, resulting margin pressure starting in Q1 2010.
•Street 2010 estimates on average modeling 40% revenue growth on 110% EPS growth with relatively flat margins. He thinks Street estimates on costs are too low.
•Receivables risk is increasing, with more potential for customer insolvency.
•Recent rally fueled largely by multiple expansion
•Checks find some installers selling branded modules below purchase price to manage working capital. “Excess pricing pressure” has driven spot prices of FSLR module ASPS to the contract level.
•Inventory of low-cost modules remains high.
Here are a few details on his individual stock calls:
•Energy Conversion Devices: Target to $13, from $17. 2009 EPS estimate to 57 cents, from 58 cents. 2010 estimate to 12 cents, from 75 cents. “Although pipeline appears to be strong, continued large project pushouts and inability of customers to secure adequate financing is likely to impact shipments over the next few quarters,” he writes. Rating remains Equal Weight.
•First Solar: Target to $175, from $190. No estimate changes. He writes that channel inventory remains a problem due to the challenging financing environment and weak demand from German wholesale segment, but that issues on competitive pricing appears to be already reflected in the stock price. Rating stays Equal Weight.
•Suntech: Target to $16, from $17.50. Rating remains Equal weight. “Shipments are currently tracking down sequentially” for the fourth quarter, he writes, with the risk of steeper than expected ASP declines increasing.
•Yingli: Target to $16.50, from $18. Keeps Overweight rating. “Checks suggest module players are offering floating price contracts with 180-day price protection to gain share,” he writes. “Given the sharp decline in module prices since Q1, we believe risks of receivables write-down has increased significantly.”
In today’s trading:
•ENER Is down $1.24, or 8.2%, to $13.82.
•FSLR is down $6.82, or 4.4%, to $147.38.
•STP is down $1.41, or 7.7%, to $16.96.
•YGE is down $1.23, or 8.9%, to $12.63.
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