In December I warned that shares of solar panel manufacturer First Solar (NAS: FSLR) were in danger of heading to the single digits, and most of my investment friends thought I was insane. Here we are just a few months later, and that CAPScall of underperform is already up 52% and more than halfway there.
I had predicted that things would get bad for the solar sector but had little clarity as to how bad. Now that I'm outside of the Fool disclosure policy's quiet period, as I had made a personal trade on First Solar in my account earlier last week, I can discuss my reasoning why I'm convinced First Solar's stock is bound to head lower.
The proof is in the pudding
You couldn't coat enough sugar on First Solar's fourth-quarter results and fiscal 2012 guidance to cover up the ugly. The company reversed a year-ago profit and lost a staggering $4.74 for the quarter, including charges. The guidance looks even bleaker.
Most of the market had been pricing with a German subsidy cutback somewhere in the neighborhood of 15%. When Germany announced two weeks ago that it'd be seeking a 30% spending curtailment on solar subsidies, First Solar got whacked. In 2010, 46% of First Solar's revenue was derived from Germany, and an ongoing crisis of confidence in Europe could sack any plans the company has of expanding production in the region. In fact, First Solar outlined plans to idle four of its production lines in Germany and cut its output by up to a full gigawatt (1,000 MW), or about 40% of its capacity.
It's the austerity, stupid!
Another major problem is no one in the solar sector has any pricing power. When the global economy was booming, polysilicon prices were exploding higher, and solar panel manufacturers could boost prices at an even faster rate. Now look at the sector. Polysilicon prices are down 59% over this period last year, and solar panel prices have nearly been halved, despite the efforts of almost every solar company to scale down its production.
Trina Solar (NYS: TSL) is one of those few companies bucking the trend and attempting to boost production despite the lower solar prices. Personally, I feel it's a foolish decision, but we'll have to wait and see how it plays out for Trina. Joining the rest of the sector, LDK Solar (NYS: LDK) , for example, cut its sales forecast in November by about one-quarter, given weakened demand and falling prices.
When pigs fly
Everyone keeps calling for a bottom in solar prices and admits that solar is the "wave of the future." But, point out to me the catalyst that signals solar prices are nearing a bottom and I'll show you a flying pig!
Other than solar prices' being psychologically lower than investors can remember, there's nothing to signal they won't be halved again. Solar panels are simply not economically efficient for most homeowners and businesses, and without local and government subsidies, I just don't see how the demand for solar panels will keep up with investors' hopeful expectations.
As for First Solar, I've already made the controversial call that it's headed for single digits. Let me follow that up with another bold call that it won't turn a profit in 2012. There's still too much solar panel supply glutting the market for First Solar to gain any market share, and uncertainty in Europe is the straw that will break this camel's back. Perhaps when a few more solar companies follow Energy Conversion Devices' path to the unemployment line, production capacity will fall in line with demand. However, in the meantime there are simply too many mouths and not enough food to go around.
Disagree with me? Let's hear about it in the comments section below.
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At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He reminds you that you can't go green without running in the green first. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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