Deutsche Bank gives a round-up of the current state of the solar industry and a Q2 earnings preview. The bank thinks three stocks will pop on upside surprises:
- First Solar (FSLR)
- Energy Conversion Devices (ENER)
- MEMC Electronic Materials (WFR)
DB also thinks, however, that uncertainty around Spanish subsidy cuts is slowing the growth of new business. It also does not expect resolution on this or the US Investment Tax Credit issue in the near-term. Lastly, favourable currency trends, which have boosted ASPs and margins, may mitigate in future quarters. Bottom line: volatility and multiple compression likely to continue.
2Q08 solar PV demand strong; regional uncertainty ahead:
Solar PV demand and pricing remained strong in 2Q08, with company results further aided by Euro appreciation versus the US dollar. However, checks indicate signs of new business slowing in regions with uncertain incentive program changes (e.g. Spain). Against this back drop, we expect solar PV companies under our coverage to report strong 2Q08 results, and guide 3Q08 largely in‐line with expectations. We look for indications of increased caution, largely due to incentive program changes, much of which we believe has been discounted.
The continued appreciation of the Euro helped ASPs and margins, but this impact may slow:
The Euro appreciated ~4.3% (average) q/q versus the US$ in 2Q08, after a 3.4% appreciation in 1Q08, and a 5.4% rise in 4Q07. This currency effect has increased effective average selling prices (ASP) of solar PV modules, and has expanded margins for companies that have costs tied to the US$. The Euro has appreciated significantly versus the US$ in recent years; broader DB macro‐ economic inputs might indicate that we should expect less of a currency benefit going forward.
Incentive program changes to drive volatility; no confirmation of a shake‐out:
Spain was the second largest market in 2007, and the marginal growth market. Uncertainty over feed‐ in tariff digressions for 2009, and more importantly over a potential installation (MWp) cap has driven substantial solar PV company stock volatility; we do not expect a resolution by
the beginning of earnings season, and believe the stocks are beginning to discount a “worst” case scenario of a low annual cap. Nor do we expect any resolution to a US ITC extension in the very near term. Furthermore, we do not expect confirmation from companies of our view of a weaker ASP environment later in 2009 consistent with our view of an oversupply dynamic building. We expect companies to be relatively upbeat on near‐term trends, with little commentary on potential longer term issues.
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