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Will Solar ETFs be Powered by Earnings Beat?

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Solar stocks and the related ETFs, which enjoyed a surge in 2013, have seen rough trading since the start of April on valuation concerns, resulting in a broad sell-off. This trend seems to continue despite strong first quarter results from the U.S. solar-panel manufacturer behemoth – First Solar (FSLR - Free Report) – on May 6.

SolarCity , the largest U.S. residential solar installer, also joined the league of earnings outperformers on May 7 after market close. The company surpassed the Zacks Consensus Estimate on both bottom and top lines.

Investors should carefully watch whether the strong results from these solar companies fuel a rally in the solar industry (read: Can Solar ETFs Continue Their Rally in 2014?).

First Solar Earnings in Focus

The largest U.S. solar manufacturer reported earnings per share of $1.10, crushing the Zacks Consensus Estimate of 50 cents and improving nearly 67% from the year-ago earnings. Revenues climbed 26% year over year to $950.2 million and was well ahead our estimate of $840.0 million. The incredible performance was mainly attributed to robust revenues from Campo Verde project in Imperial County.

For 2014, First Solar raised its earnings per share guidance from $2.20–$2.60 from $2.40–$2.80. This is well above the Zacks Consensus Estimate of $2.45, suggesting optimism in the company’s future growth story. The company also increased its operating income guidance to $290–$340 million from $270–$320 million and expects operating margin of 17–18%.

Big earnings beat as well as encouraging guidance failed to keep the shares of this thin-film solar PV maker away from the selling territory. The stock tumbled about 5.75% in yesterday’s trading session after falling 1.4% on Wednesday (read: Short the Nasdaq with These Inverse ETFs).  

Solar City Earnings in Focus

Adjusted loss per share sharply narrowed to 26 cents from 54 cents in the year-ago quarter and bettered the Zacks Consensus Estimate of a loss of 73 cents. Revenue more than doubled to $63.5 million and strongly surpassed of our estimate of $52 million.

Robust performances were credited to a huge level of panel installations and rising lease revenues. The company installed 82 megawatts (MW) of solar panels during the quarter, bolstered by a 107% year-over-year increase in residential demand.  

Solar City nevertheless provided a weak guidance for the ongoing second quarter. The company projects adjusted loss per share of 90 cents to $1.00, much wider than the Zacks Consensus Estimate of a loss of 66 cents. In addition, the solar maker expects to install 105–110 MW of new solar panels in the second quarter and 500–550 MW for the full year, up from previous expectation of 475–525 MW.

The shares of SCTY rose as much as 9% in the after-hours trading. However, the stock was down about 10.5% over the past five days (read: The Momentum Stock Crash Puts These ETFs in Focus).

Solar ETFs in Focus

Guggenheim Solar ETF ((TAN - Free Report) )

This ETF follows the MAC Global Solar Energy Index, holding 30 stocks in the basket. Of these firms, FSLR takes the top spot with 9.73% allocation while SCTY occupies the eight position with 4.97% share. American firms dominate the fund’s portfolio with nearly 42%, followed by China (25.26%) and Hong Kong (16.13%).

The product has amassed $451 million in its asset base and trades in solid volumes of more than 595,000 shares a day. It charges investors 70 bps in fees per year. The fund lost about 3% yesterday and 5% in the past five trading sessions. The ETF has a Zacks ETF Rank of 3 or ‘Hold’ rating with High risk outlook.

Market Vectors Solar Energy ETF ()

This fund manages a $28 million asset base and provides global exposure to a small basket of 34 solar stocks by tracking the Market Vectors Global Solar Energy Index. First Solar is the top holding of the fund making up for 10.06% of assets while SolarCity is the tenth firm accounting for 3.73% share in the basket (see: all the Alternative Energy ETFs here).

In terms of country exposure, U.S. takes more than one-third of the portfolio, closely followed by China (34.0%) and Taiwan (15.7%). The product has an expense ratio of 0.66% and sees paltry volume of under 10,000 shares a day. The ETF tumbled 4.5% yesterday in momentum sell-off despite FSLR earnings beat and lost 3.9% over the past five trading days.

Bottom Line

Given investors’ desire to move away from high beta and growth stocks, the solar industry could face some more trouble ahead in the coming days. However, long-term trends seem bright given the favorable green energy fundamentals and growing popularity of the clean energy source (read: 3 Green Energy ETF Buys for St Patrick's Day).

Further, the solar sector had a solid industry rank in the top 42% at the time of writing as per the Zacks Industry Rank, suggesting strong growth outlook for these firms.

Given the solid long-term outlook but somewhat bearish near-term sentiments, investors may want to consider staying on the sidelines for the time being. However, risk tolerant long-term investors may want to consider this recent slump as a buying opportunity, should they have the patience for extreme volatility.

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