North Coast Solar Stocks

October 14, 2009

U.S. solar firms’ 3Q accounting may get hard look

Filed under: FSLR, SPWR, STP — Tags: , , , , — Jason @ 6:36 pm

Wed Oct 14, 2009 6:36pm EDT

* 3rd-qtr results expected to reflect uptick in demand

* Analysts warn cash flow vs net income needs hard look

* Market watching outlook for fourth, first quarters

By Laura Isensee

LOS ANGELES, Oct 14 (Reuters) – Solar companies are likely to report their brightest earnings in a year as the industry emerges from a brutal downturn, but analysts warn aggressive accounting may cast a shadow on the sector’s outlook.

The nascent industry has seen its profit margins and sales growth erode in the past 12 months as a glut of supply and a dearth of financing in the industry stunted the business, which had been expanding by more than 40 percent per year.

Still, analysts expect companies such as First Solar Inc (FSLR), SunPower Corp (SPWRA, SPWRB) and Chinese-based Suntech Power Holdings (STP) to report more demand in the third quarter, helped by a U.S. government economic stimulus spending and increased lending by big banks that pulled back in 2008.

Whether that upturn emerges remains to be seen, and some analysts have said a worrying sign began to emerge in recent quarters as cash flow at the companies began to lag behind reported profit. The worry is that such a lag could mean companies are using aggressive accounting and may not be able to maintain their earnings.

“If that continues, your operating results look good, but your tangible cash flow is declining because you’re not collecting on your revenues. That’s a formula for disaster for any company,” said Gordon Johnson, analyst with Hapoalim Securities.

Johnson cited First Solar, whose cash flow from operations was $101 million and $158 million below net income in the first and second quarters, respectively.

SunPower’s cash flow from operations was $48 million and $21 million below net income for the same periods, while cash flow at Suntech was $2 million and $10 million below net income in first and second quarters.

First Solar, which is expected to report quarterly earnings later this month, has seen its stock fall 2 percent since the start of the year, closing at $154.32 on Wednesday.

SunPower, set to report on Oct. 22, has seen its stock fall 28 percent so far this year while shares of Suntech, expected to report in November, have risen 12 percent since January.

Companies often show a decline in cash flow versus profit during economic downturns.

Prices for solar panels have tumbled by about 50 percent since the fourth quarter of 2008, shrinking companies’ margins but attracting new buyers.

“Wall Street knows that business was strong in the third quarter. Absolutely the key question remaining is how long is this business going to hold up going into the fourth quarter and beyond the fourth quarter,” Soleil Securities analyst Paul Leming said in an interview.


Johnson said there are other red flags that could signal aggressive accounting, such as spikes in how long it takes companies to collect payments on orders and how much they set aside for future inventory write-downs.

This year about half a dozen solar companies have joined a major watch list at RiskMetrics Group, said analyst Jean-Louis Thiemele, who added that the discrepancy between cash flow and profit can cue other issues.

Barclays Capital analyst Vishal Shah said the industry would face a more intense focus on accounting, particularly with cash flow and profit to determine “how much of these earnings are real and how much of these are supposed to fall into next quarter.”

None of the major solar players face any long-term concerns yet, Shah said, although investors will be anxious to see new disclosures from Suntech about the “Global Solar Fund,” a major purchaser of solar modules in which Suntech owns more than a 80 percent stake.

The fund accounted for more than 30 percent of Suntech’s first-quarter sales, which raised fears the company was selling inventory to a unit in which it owned the majority stake. Suntech has said it will announce a large investor in the project developer this year.

(Reporting by Laura Isensee; editing by Matt Daily and Steve Orlofsky)


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