First Solar (FSLR) Guidance Routs Solar ETFs - Leveraged ETFs

Solar power has had a pretty rough 2011 as subsidies, government scandals, and an oversupplied market have conspired to keep firms in this space subdued this year. Yet, the industry did receive a bit of good news in between this gloom as one of Warren Buffett’s utilities, MidAmerican Energy Holdings, announced that it would be buying the $2 billion Topaz Solar farm in Southern California from First Solar (FSLR) (also read Follow Buffett Into Clean Energy With These Solar ETFs). Since the farm isn’t even completed yet, it gave others in the solar power sector reason to hope that even if government demand fell by the wayside private sector interest could pick up the slack. However, it appears as though the euphoria from this report was incredibly short-lived thanks to the latest guidance forecast from First Solar.

The firm announced that next year’s profits would fall below Wall Street estimates while this year’s estimates were also revised lower. This was the second revision lower for FSLR in a matter of months as the company battles to remain a force in the solar industry in the face of extreme Chinese pressure and a reduction in input costs that has made alternative component styles less expensive when compared to First Solar’s techniques. In light of this, as well as the reduction in subsidies in many developed markets, FSLR moved its expectations for 2011 earnings down to a range of $5.75-$6.00/share on revenues of $2.8 billion-$2.9 billion. This compares unfavorably to the already slashed estimates that the firm gave a few months ago which called for earnings of $6.5-$7.5/share on revenues of $3 billion-$3.3 billion.

 Unfortunately, it doesn’t appear as though this downturn will be ending anytime soon either, as the company announced that it expects to have earnings of between $3.75 and $4.25 a share on revenues in the range of $3.7 billion and $4 billion next year. Clearly, the profit margin looks to be severely depressed in 2012 although there will at least be some growth in revenues for the struggling company as it looks to realign its business to the changing world. "Transitioning away from the subsidies will put us on an entirely different trajectory from the rest of the industry. The business we're describing will be capable of strong, consistent and profitable growth for decades," Interim Chief Executive Mike Ahearn said in a conference call, in which he also announced that factories would run at 80% capacity in 2012.

Thanks to this report, shares of FSLR were slaughtered; the stock declined by over 20% and was trading at fresh 52-week lows. In fact, the current price around the $34/share level represents a cataclysmic drop from earlier in the year when prices were trading around $170 briefly, suggesting that some investors have seen a drop of close to 70% on the year. The news’ impact, however, wasn’t limited to FSLR as a number of other major solar companies also sank heavily on the report. GT Advanced Technologies (GTAT) fell by close to 4.8%, Trina Solar (TSL) was down 9.3%, Yingli Green Energy Holdings (YGE) tumbled 6.1%, and Suntech Power Holdings (STP) plunged 7.3%, reflecting how widespread the gloom was for those in the industry (read ETFs vs. Mutual Funds).

This led both of the Solar ETFs down significantly on the day as well, as the Guggenheim Solar ETF (TAN) and the Market Vectors Solar Power ETF (KWT) fell 5.4% and 4.1% respectively. Both funds also tumbled below their 52 week lows, suggesting that the pain in the solar power industry is by no means over and that Buffett’s move did little to alter the short-term fortunes of the space.

For those looking to make a broad play on this troubled sector, either of the aforementioned funds could make for solid choices. Just remember, there are a few key differences to be aware of before choosing one for a portfolio either as an enticing contrarian play or as a bet on further turmoil in the space.  TAN is slightly more focused on international securities and has greater exposure to large caps, suggesting that the volatility of the two funds could be more or less equal. Investors should also note that KWT doesn’t give its top allocation to FSLR—putting the fund third in terms of top assets—while TAN allocates close to 11.5% of its assets to the in focus firm. While this is likely the reason for KWT’s outperformance today, investors should note that over the longer-term the Market Vectors product has slightly underperformed its Guggenheim counterpart (read Three Outperforming Active ETFs).

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