Solar Stocks to Fall Further as Bubble Bursts: BofA Analysts

Prospects for the already battered solar stocks are getting darker as analysts anticipate another round of price declines due to virtual end of subsidies to the sector.

A worker cleans solar panels at a solar photovoltaic power station under construction in Xining of Qinghai Province, China.
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A worker cleans solar panels at a solar photovoltaic power station under construction in Xining of Qinghai Province, China.

“The mini-bubble resulting from the rush to cash in on solar subsidies in European and U.S. markets is ending, as feed-in tariffs drop in Europe while loan guarantee and tax credit programs tighten up in the U.S.,” says a new report from Bank of America Merrill Lynch.

The MAC Gloabl Solar Energy index that tracks the industry performance slid 26 percent in just one month. And one of the sector biggest names — First Solar— has dropped 45 percent over the same period.

Bank of America Merrill Lynch analysts see these declines continuing as the industry now faces oversupply and product pricing issues.

“We expect price declines in panels and upstream materials to resume as manufacturers chase market share and struggle to cope with excess capacity,” says the report.

Chinese manufactures have already been willing to accept lower prices to gain market share, and now aggressive pricing is expected to show up in other markets as well.

And solar companies see competition intensifying.

“Looking into 2012, we expect excess capacity and further policy adjustments in Europe and the U.S. will result in a sustained period of intense competition in the solar industry," said CEO of Suntech Power , Zhengrong Shi, on Thursday. “In this context, our top priorities are to continue to drive down our production cost, invest in channel development and bring to market the most competitive product offerings.”

China-based Suntech Power, the world's largest producer of solar panels, is the latest solar firm to report a quarterly loss and provide a grim outlook.

According to the Bank of America Merrill Lynch report, the pricing will decline more quickly than either investors or manufacturers expect, and not all companies will be able to survive in the new pricing environment.

Analysts anticipate that pricing pressures will feed back to material providers and expect prices for polysilicon, the key raw material input for solar cells, resuming decline.

“At below $25, our forecast for the end of the year, we think all poly vendors but the “Big Four” are in difficulty, which should limit future capacity additions if not drive outright shutdowns,” says the report. The “Big Four” are: Hemlock, Wacker, OCI and GCL, all trading outside the U.S.

Steven Cortes, CNBC contributor and founder of Veracruz Research, also sees solar stocks declining further and wonders about the impact of recent natural gas boom on the sector.

“As much as I love sun, I hate the solar space. This is not a real business, it’s a political construct,” Cortes said on Fast Money Wednesday. “And they can’t compete with natural gas at these levels.”

Natural gas prices fell to the lowest levels in a decade Wednesday on glut of supply.

But according to Morningstar analyst Stephen Simko, while in the U.S. low natural gas prices make solar “completely uneconomic”, outside the U.S., solar is much close to being competitive. “That’s especially true in markets where power prices are high and solar irradiance is strong,” says Simko.

Simko is not giving up on the solar sector, saying that despite negative near-term prospects, it has a promising future in the longer-term.

Joe Osha, who authored the Bank of America Merrill Lynch report, also says owning the eventual winners in the sector still makes sense. The firm has a “Buy” rating on Yingli Green Energy, Renesola and Trina . Meanwhile, First Solar, JA Solar and LDK Solar are among the stocks with a “Sell” rating.