Upcoming catalysts for near-term rallies include the announcement of new supply deals, better than expected earnings results, short squeezes and the potential for supportive legislation. The more important question investors will need to ask: Are solar fundamentals deteriorating? Banc of America analyst Eric Brown recently suggested that solar will soon follow the trend of ethanol stocks, where attractive valuations can be trumped by deteriorating industry fundamentals. Several analysts have criticized the Banc of America note, arguing that solar stocks will continue to shine. It is refreshing to hear disagreement among analysts covering the solar sector, and this is most likely a reality check after the runaway gains seen among solar stocks in 2007. We will discuss the industry outlook first, and then focus on the specific case of Trina Solar (TSL - Last trade $32.62).

Solar industry bullish arguments:

• Legislation is expected to remain supportive of solar growth.
• Solar's market size is expected to grow, with major nations reaching grid parity by 2010.
• Even though the mature solar markets (e.g. Spain and Germany) are expected to slow down, the slowdown can be counterbalanced by strong growth in additional markets in Europe, Asia and the United States.
• Empirical studies by the likes of Cowan & Co. suggest that solar expansion projects are financed with lower internal rates of returns, often in the high-single digits. The argument here is that solar expansion projects are not as risky as other expansion projects, and these projects will continue to attract capital.
• In the case of downstream companies, it can be argued that a higher supply of polysilicon will lead to lower prices, driving demand elasticity.
  

• Some argue that decelerating demand in Spain and Germany, due to declining subsidies, will drag on solar industry growth.
• Bears argue that the recent performance of solar companies have been inflated to levels that can't be sustained. They point out that both Germany and Spain have seen significant demand acceleration ahead of subsidies cut, and this source of growth can no longer be relied on.
• Bears point out that the barriers to entry for upstream companies (i.e. PV cell and module manufacturers) have diminished. Bears argue that increased competition, i.e. the emergence of thin film technology and Chinese production, will lead to lower prices and lower margins.  
• Bears believe cracks are appearing in solar fundamentals, pointing to Q4 earnings calls that have been disappointing for the Chinese solar manufacturers.
  

China  Eben Esterhuizen  EthanolBiofuels  Solar Energy  Stocks  TSL 

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