LOS ANGELES/FRANKFURT Analysts are predicting solar companies will report strong first-quarter sales but say profit margins could suffer, keeping their share prices from benefiting.
Higher-than-expected sales estimates this month from China's JA Solar and U.S.-based Evergreen Solar have boosted expectations for the sector, as demand for panels that turn sunlight into electricity rebounds sharply from 2009.
"Results should be pretty strong on the balance," said Simmons & Co analyst Burt Chao. "If we haven't passed the bottom, we're very, very close to it," he added.
Much of this year's surge in demand has occurred in Germany, where renewable energy developers have rushed to get projects in place ahead of planned cuts in incentives that have made the country the world's largest solar market.
"(Sales) are not going to be the problem this quarter. It was not the problem last quarter either. The big question for most companies will be margins," said Pavel Molchanov, analyst with Raymond James in Houston.
Increased competition from Asian companies and last year's slump pushed down average selling prices for modules as much as 40 percent in 2009, squeezing profit margins for the nascent industry. Last week, Canadian Solar warned first-quarter margins would fall below an earlier estimate.
And despite strong demand, most solar stocks, and stocks of clean-tech companies generally, have struggled this year.
Since the start of 2010, the Wilderhill Clean Energy Index, an index made up of green energy companies, has sunk 5.3 percent. By comparison, the S&P 500 has risen 9.2 percent.
Shares are not likely to see a significant upswing soon, most analysts say, as markets wait to see what will happen after the German cuts. Some say demand will drop and that companies, which have been working to bulk up their capacities, will be stuck with excess supply.
The German government is set to reduce most of the mandated prices paid for electricity from German solar arrays starting in July, with proposed cuts of 16 percent for rooftop panels.
"The (stock) underperformance is driven by the concern ... that there's too much supply and that panel prices are falling," said Wunderlich Securities analyst Theo O'Neill.
He predicted that average selling prices of modules would drop another 20 percent in 2010, mostly in the second half.
FIRST SOLAR OUT FIRST
First Solar Inc, the industry's lowest cost manufacturer, kicks off first-quarter earnings releases on Wednesday, while JA Solar Holdings reports on May 11, China's Suntech Power Holding and LDK Solar on May 21, Yingli Green Energy on May 22, and Canadian Solar on May 26.
The European sector leaders SolarWorld, Q-Cells and SMA Solar are expected to report first-quarter results in the second week of May.
Those European players have been battling to maintain market share on their home turf as they face stiff price competition from lower cost Chinese producers.
Still, analysts forecast earnings to be strong as European companies are likely to be the principal benefactors of German demand. New European markets like Italy are also seen stepping up this year.
The Chinese companies, which have grown rapidly over the past two years, could disappoint investors as the exceptional demand forced many of them to outsource cell and wafer production to meet sales agreements, according to Gordon Johnson, analyst with Hapoalim Securities.
"They're having to go buy product in the spot market, which is more expensive than making it internally," he said.
(Additional reporting by Matt Daily in New York; Editing by Steve Orlofsky)