The solar sector is taking some heat this morning from a highly bearish evaluation of the current picture for the industry by Barclays Capital analyst Vishal Shah.
Shah says investors have been focused on the outlook for demand in the second half of 2010, given the uncertainties over the timing and extent of subsidy reductions in Germany, but he sees reasons to think 2011 could pose further trouble for the group.
Several trends suggest that 2011 growth could turn out to be disappointing relative to expectations, accelerating the marker share shift to low-cost solar producers with relatively strong balance sheets, he writes. Shah sees demand risks in China, Italy and U.S. markets.
Given the lack of meaningful sustainable demand beyond 2010, intensifying currency headwinds and prospects of declining sector profitability, we expect solar shares to remain under pressure until demand from either the U.S. or China becomes more certain, he writes.
Shah made the following ratings and price target changes:
Evergreen Solar (ESLR): To Underweight, from Equal Weight; target to 50 cents, from $1.50.
LDK Solar (LDK): To Underweight, from Equal Weight; target to $4, from $8.
Suntech (STP): To Equal Weight, from Overweight; target to $12, from $16.
Yingli Green Energy (YGE): To Equal Weight from Overweight; target to $11, from $19.
First Solar (FSLR): Keeps Equal Weight, but cuts target to $100, from $120.
Trina Solar (TSL): Keeps Equal Weight, but cuts target to $23, from $28.
SunPower (SPWRA): Keeps Overweight, but cuts target to $28, from $35.
Shah in particular thinks U.S. demand could disappoint investors; he cut his forecast for 2011 U.S. demand to 1.45GW from 2.4 GW; he cut his global demand forecast for next year to 10 GW, from 11 GW. The analyst thinks earning growth could turn out to be negative for most solar companies in 2011. He sees the potentia for earnings declines of 5%-50%.
Heres a list of worries Shah has about the solar sector for 2011:
Cash grants expire in 2010.
California utilities - which he says is currently the single most important domestic market - see less of an urgency to install solar beyond the states 2010 RPS - thats the renewable portfolio standard, for those of you dont speak green.
A national RPS could take longer to pass than some expect.
California residential demand could phase out with declining subsidies in the CSI - the California Solar Initiative.
Grid parity price points are declining, which means the bar for solar company success is increasing.
Meanwhile, Shah also thinks that China appears to more noise, less action, noting that wind is a strong contends, a new feed-in-tariff is unlikely before 2011, and most demand is utility scale, which can take multiple quarters to unfold given complexities of the permitting, financing and project development processes. Shah also sees potential issues in Italy, where both financing and permitting issues remains.
In todays trading:
Evergreen Solar is down 4 cents, or 3.2%, to $1.23.
LDK Solar is down 33 cents, or 5%, to $6.25.
Suntech is down 47 cents, or 3.5%, to $12.97.
Yingli is down 86 cents, or 6.9%, to $11.59.
First Solar is down $3.64, or 3.1%, to $112.36.
Trina is down 72 cents, or 3%, to $23.69.
SunPower is down 8 cents, or 0.4%, to $19.71.
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