SPWR Soars 19%, Solar Names Rally on Polysilicon Cuts

Shares of solar energy technology makers soared today as word of tight polysilicon supply brightened an outlook for the companies, including SunPower (SPWR), up $1.51, or 19%, at $9.44, and First Solar (FSLR), up $1.96, or almost 7%, at $32.36.

Credit Suisse‘s Satya Kumar today wrote that prices for polysilicon, a basic building block of solar panel modules, are “at a trough,” as Germany’s Wacker Chemie AG and Hemlock Semiconductor, a division of Dow Corning, lowered polysilicon production last quarter, and Hemlock forecast production to drop again this quarter.

First Solar’s thin-film cadmium telluride modules don’t really fit with the polysilicon theme, but have obviously been caught up with the general enthusiasm for improving industry economics.

Kumar opines a major obstacle for solar stocks has been removed, as Corning and others restructure their polysilicon production to deal with a collapse in sales:

Corning revealed Hemlock�s financials for the first time, revealing a steep drop in 2012 poly revenue and earnings y/y to explain the need for restructuring. These tier 1 poly production cuts lend credence to our view that after years of pricing declines, now finally poly and panel pricing have bottomed for the solar industry. A flat pricing has diminished the �second derivative� negative for solar stocks. Positives for solar stocks are: (i) stable pricing leading to gradual demand recovery in new geographies; (ii) policy driven positives in China (potential for 8+GW of demand in 2012); and in the US possibility of solar qualification for MLP/REIT structures (though our checks are mixed on this); (iii) relative stability allows some companies to potentially surprise on the upside through execution (e.g., JinkoSolar Holding (JKS) and Canadian Solar (CSIQ) downstream EPC activities could positively surprise investors in 2Q13; SCTY & WFR could benefit from the US market).

Opines Kumar, the next things that need to happen to help the stocks are that “excess panel capacity in China needs to be permanently retired,” Hemlock and Wacker need to resolve the matter of oustanding “take or pay” contracts with customers, and the market needs to see whether Europe imposes tariffs on China-based solar providers.

Kumar says his preference in solar is for polysilicon producer MEMC Electronic Materials (WFR) and SolarCity (SCTY). SolarCity shares today rose $1.54, or 10%, to close at $16.67, while WFR stock was unchanged at $4.48.

The group has notched impressive gains this year, with SunPower up 68%, Canadian Solar up 44%, and Solar City up almost 40%. First Solar has notched a more modest 5% gain.