Solar panel makers are finally seeing signs that the clouds could be lifting from their embattled sector, sparking a stock rally for their volatile shares. Canadian Solar (Nasdaq: CSIQ) led off the upbeat news, releasing preliminary results that included better-than-expected first-quarter sales and margins. But perhaps more importantly, other reports said the industry is seeing some of its first sustained price increases after more than 2 years of declines. Those 2 pieces of good news ignited a rally for solar shares, led by Canadian Solar whose stock rose more than 12 percent to a new high not seen for more than a year and a half. (company announcement) Shares of JA Solar (Nasdaq: JASO) also rose a healthy 11 percent, while Trina Solar (NYSE: TSL) was up 7.5 percent. Even embattled LDK (NYSE: LDK) shared in the gains, rising 8 percent in the rally.
Let’s start with Canadian Solar, which said it now expects to report that first-quarter shipments totaled 335-345 MW, or about 13 percent higher than its previous forecasts. The company also said first quarter gross margins would come in at 9-10 percent, a slight improvement over its previous forecast. Equally important, the latest margin forecast is a significant improvement over the 5 percent gross margins in last year’s fourth quarter, indicating the company’s net loss is likely to show strong improvement when it releases its final first-quarter results.
Canadian Solar made its relatively upbeat announcement as other media reported the first sustained pricing gains for solar panels in more than 2 years. The reports cited data tracking firm iSuppli saying the price of Chinese panels shipped to the European Union rose 4 percent in March and another 1 percent in April. (English article) Those increases marked the first monthly rise for the sector in more than 4 years before it entered its current prolonged downturn caused by massive oversupply. iSuppli further predicted that solar panel prices in Europe would rise by an average of 4 percent over each of the next 3 months.
So now the big question becomes: Will these new price increases help companies return quickly to profitability, and what does that mean for these companies’ stocks? The answer is probably quite complex, since this nascent rebound comes just as China embarks on a major overhaul for its solar sector. That retrenchment is likely to see bigger names like Canadian Solar and Trina pressured to take over operations of smaller, less efficient firms as part of a Beijing-led effort to salvage as much of the sector as possible.
I doubt that any of the larger companies will have to take over completely hopeless operations of other companies, which are more likely to simply be shut down as part of this overhaul. Still, the big players will ultimately have to take over at least some other companies’ operations, creating integration issues and also prolonging their own return to profitability.
In terms of stocks, the bigger names like Canadian Solar, Trina and Yingli (NYSE: YGE) do indeed look like strong bets at this point, as most still trade far below the meteoric highs reached just 3 years ago at the height of bullishness on solar energy. Protectionism in the US and Europe remain potential risks, but even those are at least partially offset by expected new demand in developing markets and also in China.
In a world where overly optimistic companies have incorrectly predicted an end to their downturn for much of the last year, it’s hard to say if this time the worst is really finally over. But the recording of the first price increases in more than 4 years by a third party observer like iSuppli is certainly a good sign, and it’s possible we could finally start to see companies’ losses start to shrink later this year.
Bottom line: Recent price increases indicate the solar sector may finally be exiting its prolonged downturn, which could help to spark a rally in solar stocks.