What in the World Is Going on With Solar Stocks?

The past week has been a head-scratcher in the solar industry. Efficiency leader SunPower (NAS: SPWR) announced layoffs and the temporary closure of some production lines; industry laggard LDK Solar (NYS: LDK) received an infusion from a Chinese investor; and earnings reports suggest it may be another rough quarter for solar companies.

What does this mean for solar stocks? Here's my take on these three developments.

What's going on in China?
U.S. markets are being crushed today, and U.S. companies First Solar (NAS: FSLR) and SunPower are falling more than 2% along with the market. But most Chinese solar stocks are up as of this writing. What in the world is going on?

Chinese stocks in general are rising on hope that China's new leadership will continue to stimulate the economy. The solar industry is beginning to benefit from large installations in China, and investors are betting that the industry will continue to grow.

We're also starting to see some action by companies to shore up their balance sheets -- sort of. LDK Solar said it was selling a 19.9% stake in its company to Heng Rui Xin Energy for $23 million and has gotten a big boost as a result. Companies like LDK Solar, Suntech Power (NYS: STP) , and Yingli Green Energy (NYS: YGE) have more than $1 billion of net debt, and they need to find ways to pay off this debt. Equity sales are one way to do that. LDK also recently had some of its debt paid off by the local government of Xinyu, where the company is based.

More funding and less debt is good, right? Maybe it would be if LDK Solar had a manageable debt load, but I doubt a $23 million investment will impact $3.27 billion of net debt. After all, it is only 0.7% of that total, and the company is far from profitable. It's also important to note that the funding comes from a company that's 40% owned by a state-owned company when debt is coming from state-owned banks.

Companies like Trina Solar (NYS: TSL) and Suntech have started to acknowledge the long-term challenges by restructuring their businesses, which should be seen as a positive for the industry. But bailouts for LDK or other low-tier producers are only going to hold up weak solar companies in the short term and delay the industry's consolidation. Whether you're looking at a Chinese manufacturer or a U.S. manufacturer, unsustainable companies (like LDK) staying in business for longer than necessary is not a good thing.

Layoffs again
SunPower has been driven significantly lower over the past week after announcing the elimination of 900 jobs and the idling of half of its cell manufacturing lines in Fab 2 and a 20% reduction in panel manufacturing. It's no surprise that the market has punished the stock as a result.

In this case, it's important to note that the company didn't change its 2012 guidance, and said it remains on pace to reach cost per watt of $0.75 on an efficiency-adjusted basis by the end of the year.

So, what is going on with SunPower? My take is that the company is making a major effort to reduce inventory and keep a strong balance sheet as the solar industry shakes out. SunPower has been forced to take big writedowns on inventory in the past as prices plunged, and this will reduce that risk. This doesn't mean that layoffs or reducing production is a good thing, but it may be prudent given the current environment. First Solar has made similar moves in recent quarters.

Maintaining current guidance is also important because it gives an initial indication that sales aren't going to be greatly affected this year. I am concerned about this going forward and will be listening keenly on the earnings call to get an indication of the trajectory of SunPower's sales.

I'm a shareholder, and I've gone from looking to add to my SunPower stake to taking a wait-and-see approach. I don't think any solar stocks are going to pop in the next quarter or two, so if you're waiting on the sidelines I would stay there until more supply leaves the market and winners begin to emerge.

Earnings signs
This morning, DuPont said that PV sales were weak, and the company's earnings were hit as a result. 3M   (NYS: MMM) also said that renewable energy sales declined year over year. Both of these companies are suppliers to the solar market, so we can't conclude that every solar company's results will be weak, but it is an early warning sign that it may be a long earnings season.

Foolish bottom line
Reports of layoffs from SunPower and weak earnings reports are a negative for the industry as a whole, and investors should use caution going forward. I also don't see LDK's infusion as a good sign for an industry desperate for consolidation.

I'm still bullish very long-term about the solar industry, but picking winning stocks will be tough, and it may take longer than investors hope to determine who will emerge a winner.

One company that still has as good a shot as any is First Solar. If you're looking for our recommendation on how to play First Solar along with continuing updates and guidance on the company whenever news breaks, we've created a brand new report that details every must-know side of this stock. To get started, just click here now.

The article What in the World Is Going on With Solar Stocks? originally appeared on Fool.com.

Fool contributor Travis Hoium owns shares of SunPower in both personal and managed accounts. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend First Solar, 3M, and Suntech Power. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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Thi sis the battle cry !!

October 23 2012 at 4:45 PM Report abuse rate up rate down Reply

Solar investors has to understand or own up to the fact that either solar stocks conquer oil stocks or be conquered. we have to conquer oil ! or else!

October 23 2012 at 4:45 PM Report abuse rate up rate down Reply

REad my first comments first . So First Solar or Sunpower or those Chines ones are focused on converting photons into electrons for electricty which is great... There is also another technology that you can use solar photons direclty in form of heat... Why we dont have both... Tell me why?? Of course, it will involve mirrors or reflective surfaces .. Mirrors is not always brittle as many is flexible or can be cut into thousands of tiny mirrors angled toward a focal point in any adjsutable length as far as a hundred foot away or more or as close as an foot or less. There is a need for engineering to develop reflecting mirrors with varying focal length that can be adjusted automatically for all kinds of applications anyone can think of with all different levels of concnetration ranging from 10 to 1000X or more.. it is a challenging technology to develop... Lets do it!

October 23 2012 at 4:43 PM Report abuse rate up rate down Reply

There is another form of solar energy that is to bounce sunlight toward a concentrated solar furnace for home heating similiar to the familar heliostat based electricity generating tower. I am talkiing about heating air not water which is not new. We can use solar energy to heat air for many uses like drying clothes, thawing snow off roofs, clearing out sidewalks and driveways.. Concentrated sunlight can do lots of wonder.. You will be amazed at how powerful 500X concentration can do things.. Is it dangerous, oh sure, no different than operating a snowplow.. Operators has to know how to operate them safely. You can adjust focal length so it cannot do harm outside its focal point. You can drive by and focus 500X sunlight at a rooftop and melt all the snow and ice in 15 minutes by aiming around it as snow melt almost instantly!! it is like magic!! Why we still dont use solar concentration technology really BOGGLES MY MIND!!! Only if I know how to make them and sell myself. .. I will be rich.. Nobody will want o work for me and this is why I couldnt do it all on my own. Yo see? Of course only when the sun shines no matter how cold it is outside.. it will work as well at any outside temperature.. It is all photons!!! not electrons as for photovoltaics.. Solarphotons that is !~!!!!!!!!!!!!!!!!!!!!!!!!!!

October 23 2012 at 4:38 PM Report abuse rate up rate down Reply

Travis, you know what is really funny about solar panels.. They comes in all sizes ranging from postage sized ones to maybe 3 by 5 foot panels. I dont know about any bigger panels if any. Anyway. when it comes to solar attic fans... they put a square foot solar panel instead of a full sized solar panel like 3 by 5 foot panel. Why bother to cut down to usless and weak sizes?? Who can use a puny 20 watt solar attic fan to cool my 200 degree F hot attic during hot sunny days. I live in a hot cilmate area. I do not live in San Francisco or London, mind you? Those designers are designing ineffective solar attic fans as if to protect the steady revenues as well as dividends for those utiltiies and stakeholders. A bigger solar attic fan with a bigger solar panel that can deliver 100-150 watts can do a much better job of removing superheated air out of attics and help reduce our reliance on our 6000 watt central air conditioners. I could easily wager that a watt of solar attic fan can save over ten watts of air conditioning. I thought that we are all out to conserve energy, but I was all flat wrong ! Dont ever try to criticize me.. I know what it is like to live in a hot climate area.. I had to improvise my own attic cooling system of all my own... The federal program dont even offer tax credits for bigger attic solar fans.. because it doesnt seem to do the research right themselves.. So much for the govenrment's research and development!! There is bad revenues and good revenues .. Ditch the bad revenues !!

October 23 2012 at 4:27 PM Report abuse rate up rate down Reply