After dismal second-quarter, solar outlook brightens

Solar investors should brace themselves for some downright dreadful second-quarter earnings reports in the coming weeks, though the rest of the year may provide some relief to battered solar stocks as panel prices stabilize and profit margins recover.

The solar market likely bottomed in the second quarter after pullbacks in subsidies in No. 2 solar market Italy stalled development of projects there this spring, creating an oversupply of solar panels in the market and sparking a more than 20 percent drop in prices.

"It's going to be probably the most challenging quarter we've seen in the space since the financial crisis," Kaufman Bros analyst Jeff Bencik said. "Volumes are starting to pick back up, but we have pricing declines of 25 to 30 percent across the supply chain."

Solar power relies on government subsidies to compete with electricity generated by fossil fuels such as coal and natural gas. In general, drops in the price of solar power are a good thing for the subsidy-dependent industry -- but manufacturers struggle if they can't cut costs at a similar rate.

Solar modules cost about $1.80 per watt in the first quarter, and are now selling for $1.40 per watt or less.

That drop has taken a big toll on manufacturers' profit margins and sent their stocks into a tailspin.

To see an interactive graphic comparing solar companies, click here: r.reuters.com/vej82s

Gross margins for photovoltaic module manufacturers have fallen by 25 percent in the last six months, according to research firm IMS Research.

The solar earnings season will kick off in earnest with First Solar Inc's results on August 2, followed by reports from U.S. wafer maker MEMC Electronic Materials Inc and U.S. solar manufacturing equipment maker GT Solar a day later.

Many German solar companies, including SolarWorld, Centrotherm, Phoenix Solar and SMA Solar, are scheduled to release results the week of August 8.

But some big solar players -- including U.S.-based SunPower Corp and China's Renesola Ltd -- have already warned of weak results in the second quarter.

Germany's Q-Cells SE, which will report results August 12, has also said that demand remained weak during the second three months of the year, while Norway's Renewable Energy Corporation last week was hit by a $1.16 billion impairment, due to under-used factories.

The industry turmoil has also weighed on share prices. The MAC Solar Energy index is down 27 percent since the beginning of the second quarter.

Many expect solar companies' fortunes to improve in the second half of the year as lower prices on panels unleash a new wave of demand.

Solar inverter maker Power-One, for instance, said on Thursday that its sales in the third quarter would benefit from increased sales to rising markets in North America and Asia as well as an improved market in Germany.

SunPower's announcement this week also indicated that demand was strong, as the company said its revenue would be at the high end of a previously forecasted range, despite contracting margins.

Increased demand should help stem the rapid drop in prices that has crippled the industry in recent months.

"A lot of companies are seeing volume increases, which is the good news," said Jon Sigurdsen, fund manager at DnB NOR unit Carlson in Oslo. "Very recently a lot of companies have said prices are stabilizing."

Overall, outlooks for the rest of the year should be positive, analysts said, but warned about another round of subsidy cuts in 2012.

"The next cut in feed-in tariffs in January 2012 is just around the corner," said Michael Tappeiner, an analyst at Unicredit in Munich. "It'll remain very tight for the sector overall."

The question is whether investors will dive into the beaten down sector and pick up solar stocks at bargain prices now that the worst of 2011 is over.

"Do investors play that rally again as they have in the last few years, knowing that it's a little flash in the pan? Or do they say, 'You know what? It's a waste of my time,'" Baird analyst Michael Horwitz said, adding that he expects to see some German and minor Chinese solar players go out of business next year.

"You can't have 20 players in every part of the value chain," he said.