Solar companies' share prices have collapsed during 2011, largely because of two major factors. First, solar industry fundamentals have been deteriorating and are now as weak as they've been in years. Industry supply has overshot demand by a wide margin in the past few quarters, resulting in a collapse in pricing and margins and balance sheet degradation. One boost many hoped for was the normally strong late summer/early fall rush in Germany, but this failed to materialize. Second, overall stock market volatility has increased, which is causing extreme movements in the always volatile solar shares. This will remain the case so long as the market continues to shy away from risk. Given the very weak industry conditions, share prices could be detached from underlying valuations for a while to come. We would avoid investing in solar firms right now, with the exception of First Solar (FSLR).
We expect an industry rebound will not occur until mid-2012 at the earliest. Solar demand growth remains promising in the long term, but near-term growth rates are going to be very modest. We think the industry is looking at 18.5 gigawatts of global demand in 2011 and 20.9 GW in 2012. Anything short of 25 GW probably won't change current dynamics; estimates of inventory in the channel are 8-10 GW, and production capacity ready to be used is still at least 25 GW. This oversupply situation will not be solved by demand growth alone, but will require supply rationalization in the form of bankruptcies, factory closures, and temporary shutdowns.
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Stephen Simko does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.