First Solar spurs worries about 2011

First Solar's third quarter earnings managed to raise concerns about an oncoming glut of solar panels, increasing production costs and price competition.

The company's quarter was far from disappointing. First Solar reported third quarter earnings of $2.04 a share on revenue of $797.9 million. Wall Street was looking for earnings of $1.95 a share on revenue of $778.5 million. However, First Solar's third quarter production costs increased to 77 cents per panel on average from 76 cents in the second quarter.

What a difference a penny makes. First Solar is the cost leader on solar panel production, but analysts fear that Chinese manufacturers will close the gap. Meanwhile, China is expected to ramp its capacity. Toss in concerns about subsidy cuts in Germany and other countries and you could have too much supply for the expected demand. First Solar, however, noted that a new process increased average costs per panel.

The big worry is that First Solar will see falling average selling prices into 2011. Among the moving parts:

• Average selling prices on panels will fall.
• German demand is expected to fall as subsidies dry up. First Solar noted that it has already handed over pricing concessions to keep volume moving in 2011.
• Most manufacturers are ramping up solar panel production and could create an industry glut.

First Solar CEO Rob Gillette was generally upbeat, but noted a few items that worried analysts. Among them:

• "We've implemented price adjustments in Europe that we believe positions us positively for 2011. Number two, we're incenting our partners to continue to diversify across Europe and other transition markets to grow the industry."
• "The Chinese government views the development of a low-carbon economy with a focus of renewable energy generation and energy efficiency as a top priority. In addition, the electricity is demand expected to double between 2010 and 2020. The Chinese are committed to a goal to build a multi-gigawatt per year solar market and at least 20 gigawatts by the year 2020. Although the market has long-term potential, the systems providers need sustainable economics to drive growth."
• "We maintain the opportunity to look at rebates or something that may make sense in the future. So, I don't think that we completely rule that out. I think that there are a number of reasons because mainly the decline in Germany, there's going to be price pressure."

Wedbush analyst Christine Hersey said:

While we acknowledge that industry conditions are strong now ahead of subsidy changes in key markets, we believe oversupply conditions may resume in 2011 pressuring ASPs and margins. As key European markets slow down, we expect the company will continue its shift to developing more projects on its own and assuming project development risks.

It remains to be seen if these worries about First Solar are legit. In any case, First Solar has the heft to manage rocky conditions. The rest of the industry could be in for a rough time.

This post was originally published on Smartplanet.com