As I pointed out in a previous note on Solarfun (SOLF – Last trade $12.78), it would have been wise to wait until the company's earnings results before jumping on board. The company's biggest market is Germany, and we have started seeing evidence of slowing solar demand in the country impact the earnings of other solar plays.
The bad news: SOLF reported Q4 sales at $31.4 million, below analyst estimates (the revenue decline is similar to revenue decline in other solar plays). The company reported an output shortfall, attributable to reduced wafer supplies from their key partners. Access to wafers continues to be problematic for the company, reporting 7.9MW of shipments (analysts expected 9.8MW) at an Average Selling Price (ASP) of $3.96 (analysts expected $3.85). Management said it expects gross margins to drop due to seasonal slowness and uncertainty surrounding renewable energy policies in some countries. SOLF guided 2007 revenue of $285 million, below consensus of $301 million.
The good news: The company seems to be managing its costs better, as gross margin of 26.8% beat estimates of 24.5%. Management said it has about 50% of the 80-90 MW 2007 output guidance is already under contract and has enough wafer contracts in place to meet about 66% of their guidance. The company also indicated it has secured 67% of its required silicon supply in 2007 at costs similar to 2006.
Why I like the stock: Markets are overreacting to the company's guidance, creating a solid buying opportunity. Note that the 16%-35% ASP declines implied in their guidance is well below the 5%-10% decline range guided by other solar plays. SOLF 2007 revenue guidance only reflects management's more conservative view of the ASP trend, but the company could actually see upside surprises in their 2007 ASP. The company's revenue mix is skewed toward higher ASP markets, such as Italy and Spain, and they are making inroads into the more attractively priced U.S. market. In addition, with the recent Underwriters Lab Certification the company's ASP could see more upside.
SOLF shares are trading down sharply after management’s guidance, but today's earnings is probably the last piece of bad news for the company. Time to buy SOLF on valuation after the recent (unjustified) sell-off of U.S. listed photovoltaic companies based in China.
Disclaimer: I do not own any stocks mentioned above. I do not give investment advice. Do your own research. Do not rely on anything in this blog to make investment decisions. Consult an investment professional familiar with your specific financial situation before buying or selling any security.