Solar ETFs Still Slipping On Falling Oil

Thursday November 20, 6:24 pm ET
Trang Ho
Investor’s Business Daily

Uncertainty in demand from Italy, slowing U.S. new-home starts, a weakening euro, declining oil prices, a sharp drop in solar panel prices and investor flight to safety have cast a dark cloud over the once white-hot solar energy ETFs.

Market Vectors Solar Energy (KWT)and Claymore/MAC Global Solar Energy (TAN) have tumbled 73% and 74% from their May highs. They are textbook examples of how the higher stocks fly, the harder they fall.

By comparison, the S&P 500 has fallen 45%, and IBD’s oil & gas integrated industry group has sunk 56%.

Both ETFs on Tuesday undercut their previous lows from October’s sell-off and gapped lower Wednesday, when benchmark crude oil fell to $49.76 a barrel. That is the lowest price for oil since May 2005.

Dim forward guidance from ETF portfolio components JA Solar (JASO) and SunPower (SPWRA) last week alerted the market to more possible disappointments from companies reporting this week: ReneSola (SOL), LDK Solar (LDK), Trina Solar (TSL), Suntech Power Holdings (STP) and Canadian Solar (CSIQ).

But despite being 71% off its high, prospects remain bright for the largest company in the sector: First Solar (FSLR). It raised its fiscal 2008 revenue outlook in late October.

JPMorgan Securities initiated coverage of First Solar on Tuesday with an overweight rating. The company has significant manufacturing scale and a strong balance sheet, and will better weather the turbulence facing the solar energy industry, analyst Christopher Blansett wrote in a client note.

But First Solar wasn’t immune to the group sell-off. It gapped down nearly 9% on Wednesday in heavy volume.

Meanwhile, Blansett lowered ratings on small-cap peers Evergreen Solar (ESLR) and Ascent Solar Technologies (ASTI) to underweight from neutral. He said they were unlikely to generate positive free cash flow until 2010.

Clouds Over Industry

Reduced solar subsidies in Europe next year, higher borrowing costs and increased competition at all levels of the solar photovoltaic industry will put pricing pressure on solar components, Blansett says. He expects prices for solar systems and related parts to drop more than 25% in 2009 but believes demand will remain strong.

ReneSola announced that for fiscal 2008, it still expects annual production output to be in the range of 340 to 350 megawatts and annual net revenue to be in the range of $640 million to $670 million.

ReneSola’s earnings rose between 113% and 280% in the past four quarters, while sales tripled and nearly quadrupled over those periods. But analysts polled by Thomson Reuters see earnings falling 71%, 21% and 8% in the next three quarters.

Suntech on Tuesday said Q3 earnings rose 52% to 38 cents a share, missing analyst estimates. Revenue climbed 54% to $594.4 million. Shares fell 10% on the day and gapped lower Wednesday as markets slumped to multiyear lows.

Daiwa Institute of Research, based in Hong Kong, recently rated the stock outperform.

“We think that by leveraging on its competitive cost structure (economies of scale), over $500 million cash in hand, proprietary Pluto technology and global distribution network, Suntech would solidify its leading position further over the next few quarters,” analyst Pranab Kumar Sarmah wrote in an equity research report issued Tuesday.

Trina Solar reported Q3 earnings of $1.17 a share, up 318%, beating analyst views. Sales soared 252% to $290.7 million.

Trina said in mid-October that it was on track to meet or beat fiscal ‘08 estimated net revenue of between $850 million and $900 million.

Still, S&P Equity on Tuesday lowered its rating on the stock to strong sell from hold. Deutsche Bank cut its rating to hold from buy the same day.

Going Dutch

The Changzhou, China, firm announced Tuesday that it will establish warehouse operations in the Dutch Port of Rotterdam, one of the largest in Europe. The company said it expects to be in service in the fourth quarter of this year and that it would strengthen its distribution network in Europe.

Analysts expected Canadian Solar, due to report Friday, to post a Q3 earnings increase of 391% to 54 cents a share.

The China-based company’s stock is 91% off its June peak.

LDK reported a 108% rise in Q3 earnings, beating estimates. Sales rose 241% to $541.8 million. Analysts expect earnings to be up 150% for 2008, but they see growth slowing to 31% next year.

The stock gapped lower Wednesday, reasserting its downtrend.