Dow Jones Newswires September 30, 2017 12:49:00 AM ET
"One problem they have is a lack of differentiation and a lack of discipline," says Morgan Stanley analyst Stephen Byrd of the solar manufacturers. "Manufacturers just keep increasing their manufacturing capacity, well in excess of demand." Even before accounting for the depressive effect of any U.S. tariffs, Byrd and other analysts had been expecting global demand for solar modules to level off in 2018, as solar installations slow in China's giant domestic market, which accounts for more than half of the world's sales.
THE U.S. MARKET -- the world's second largest -- is facing a similar slowdown, and that could hurt foreign manufacturers, too. Rooftop solar installations in the U.S. are expected to fall this year for the first time. Sales pitches that might have worked on early solar adopters are proving to be a harder sell, and installers are pulling back their marketing, with some prioritizing profits over unit growth. Utility-scale solar continues to grow, but overall solar-power growth is set to fall in both 2017 and 2018, according to the SEIA.
Nevertheless, producers like Jinko have kept adding capacity. Byrd expects that solar-module production capacity will exceed the world's demand next year by a whopping 35%. Tariffs in the U.S. -- and any retaliatory tariffs by other countries -- could make that excess capacity worse. Jinko and JA Solar declined a request from Barron's to talk about the trade case.
"Unfortunately, all the things that have made 2017 a little bit better than expected will make 2018 a little bit more challenging," says Esplanade's Kravetz. It wouldn't be the first time that a solar-sales boom has been followed by a bust, he notes, which is why he looks to buy the stock of a solar manufacturer only when the market has left it for dead.
At 16 times the consensus forecast for 2017 earnings, Jinko's recent price of $24.95 values its ADRs well above their historical average of six times earnings. At $7.62, JA Solar's ADRs go for a multiple similar to this year's earnings (and for more than the $6.80 per ADR offered in June by the company's CEO, in a going-private proposal). If the companies' already-thin earnings get pinched by overcapacity and tariff-curtailed demand, their shares have room to fall.
Toronto-based Canadian Solar (CSIQ) is also a large overseas producer of modules and a target of Suniva's ire. With some plants in Canada, Canadian Solar might be able to shift more production there to benefit from the North American Free Trade Agreement, though the administration could still choose to punish the company.
SunPower is a different story. Founded over 30 years ago by a Stanford University professor, the San Jose, Calif.-- based company has long made high-purity solar cells that are among the industry's most efficient. The problem is that most of those cells are manufactured in Southeast Asia and could get slapped with tariffs under an ITC action.
Although SunPower is two-thirds owned by French energy giant Total (FP.France), the rest of its shares trade on Nasdaq for $7.29 each. The company says it employs 1,300 people in the U.S.SunPower ran at a loss for the past couple of years and had negative gross margins in this year's March quarter. In the June quarter, it lost $94 million, or 67 cents a share, on revenue of $337 million. SunPower had hoped to return to profitability in 2018, but a tariff on its products would threaten that recovery.
CEO Tom Werner says the trade petition seems to uniquely target SunPower. "It's kind of absurd," he laments. "We're an American company, and we face potential tariffs." He hopes the administration will pay heed when he testifies on Oct. 3.
The largest group of U.S. businesses hit by solar tariffs would be those that buy imported modules for installation on homeowners' roofs or the big arrays developed for utility companies. About two-thirds of these companies are small businesses. After last year's acquisition of SolarCity by Tesla (TSLA), there remain just two public companies focused on homeowners: Vivint Solar (VSLR), based in Lehi, Utah, and Sunrun, with some 7% and 13% of the market, respectively.
Despite revenues growing to about $73 million in the quarter ended June 2017, Vivint has consistently lost money and run negative gross margins. It can obviously ill afford higher costs on its imported solar materials. Since June, the company's shares have slid from $6 to $3.40.
Shares of Sunrun have fallen about 17% in the past month, to $5.55, with the ITC case threatening the company's margins. The valuation argument made for Sunrun stock by the company and bullish analysts is an arcane forecast of cash flows expected from the company's rooftop solar contracts. Sunrun's income statements have reported consistent net losses and negative cash flow -- but after backing out losses attributable to the tax partnerships that supply it with most of its capital, the company says its shareholders earned $25 million, or 23 cents a share, on revenue of $138 million in the June quarter.
Sunrun's co-founder and chairman, Edward Fenster, says that the two firms asking for tariffs don't even represent most jobs involved in building solar systems. "This isn't manufacturing versus installation," he says. "This is 2% of manufacturing versus 98% of manufacturing jobs and all of installation." Fenster acknowledges that tariffs would hurt Sunrun. The magnitude of that pain was considered in a July 25 note by Guggenheim Securities analysts, who concluded that the increased costs from tariffs could render about two-thirds of Sunrun's addressable market uneconomical. Guggenheim maintained its Buy rating on the stock, nevertheless, on the premise that any trade penalties would be temporary.
Increased costs might be bad for residential installers like Sunrun, but Fenster hastens to point out that higher- cost modules would be a bigger pain for the large-scale solar projects favored by commercial customers and utilities, which run on thinner margins than a residential installation.
THE THREAT THAT TARIFFS pose to U.S. utilities is one reason that bad news for most solar companies would be good news for First Solar, which focuses on big projects. The trade dispute concerns only solar cells made from wafers of silicon. Since its start two decades ago, First Solar has made its solar panels with a completely different technology that uses a thin film of cadmium-telluride. So even the products that First Solar makes abroad would be exempt from the burdens imposed on imported solar cells made of silicon.
First Solar's thin-film technology has always been cheaper than silicon, and the company is launching a new series of panels that will be even more cost-effective. If tariffs raise the price umbrella of competing silicon modules, First Solar can raise its own prices and still go to utility-scale developers and offer to rescue their stranded projects with its thin-film panels. Every penny of these price boosts would fall to its bottom line, and it could demand equity in those projects.
First Solar's shares have fallen by about 10% since the ITC decision, to a recent $45.88. Most analysts have been cautious about First Solar since it reported a huge December 2016 quarter loss on restructuring charges. But Deutsche Bank's Vishal Shah raised his rating to a Buy in September and now thinks that the shares could rise to $65. If tariffs prop up the price of competitors' silicon modules, Shah thinks that, in the best case, First Solar could earn $3 a share in 2018 and $5 a share in 2019. With an 18 times multiple on those 2019 earnings and the company's $20 a share in excess cash, the stock could rise to $110.
First Solar declined to talk to Barron's about the trade case, saying that it is "monitoring developments closely."
Solar pricing has a history of cutthroat competition, and this administration is anything but predictable. But investor Kravetz likes First Solar's chances. "They could be the sunniest spot in a cloudy industry," he says.
