Last year was surprisingly strong for solar manufacturers, with sales driven higher by a surge in demand from China and the U.S. Not only were volumes significantly greater than expected, with estimations that more than 100 GW of solar panels were installed, panel prices surged as well.
As we head toward fourth-quarter earnings season, there's reason to think the sector's results this time could be even stronger than investors are expecting.
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Supply and demand is basic economics, so it makes sense that when demand for solar panels is high, prices for them will rise. The table below from GTM Research shows that's generally what happened so far in 2017. And there's no reason to think the fourth quarter will be any different.
The Q4 results are likely to demonstrate that U.S. installers were stockpiling solar panels in anticipation of President Trump imposing tariffs on imported panels. (His decision on that is expected soon.) I wouldn't be surprised to see that panel prices ticked a penny or two higher during the quarter.
How earnings could be impacted
Where solar manufacturers will feel the impact of higher solar panel prices is in their gross margins. As panel prices increase and/or the spread between cell costs and panel prices increases, companies that make modules will see margins rise.
SunPower (NASDAQ: SPWR) is a good proxy for this dynamic, given the granularity with which it reports its margins. Between the first and third quarter, commercial gross margin increased from 3.6% to 16.2% and residential gross margin increased from 15.3% to 21.5%. A lot of that improvement can be accounted for by higher solar panel prices.
I would also expect JinkoSolar (NYSE: JKS), Canadian Solar (NASDAQ: CSIQ), and JA Solar (NASDAQ: JASO) to see higher margins as solar panel prices rise. They are among the lowest-cost producers in the industry, and would benefit from even a few cent rise per watt in the price of solar panels.
Losers from higher panel prices
Not all players in the solar industry will like higher panel prices. Developers like Sunrun (NASDAQ: RUN), Vivint Solar (NYSE: VSLR), and Tesla (NASDAQ: TSLA) will likely reveal that they experienced higher costs late in 2017. And they've already been facing cost pressure as sales costs have come under fire in recent years.
Developers like AES's (NYSE: AES) sPower and NextEra Energy's (NYSE: NEE) development wing will also see higher costs, which can squeeze already tight margins. If panel prices remain high into 2018, this could become a real challenge.
Expect a better quarter from some in solar
If industry reports are correct, solar manufacturers should have a much better quarter than they did early in 2017, and their momentum could continue into 2018. Solar panel supply is tight right now, and Chinese developers are rushing to complete projects before their government reduces feed-in tariffs at midyear, while U.S. developers are stockpiling panels ahead of potential tariffs. Manufacturers should be cashing in while conditions are good.
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