Thursday, October 15, 2009

U.S. solar firms' 3Q accounting may get hard look (FSLR; SPWRA; STP)

Update: "UPDATE: "Solar companies defend accounting practices" (FSLR; SPWRA; STP)"
Original post:
We noted this problem a couple weeks ago in a link to a Tech Trader Daily post "Report: Solar Stocks’ Aggressive Accounting Raises Red Flags". Here's an update from Reuters:

* 3rd-qtr results expected to reflect uptick in demand

* Analysts warn cash flow vs net income needs hard look

* Market watching outlook for fourth, first quarters

By Laura Isensee

LOS ANGELES, Oct 14 (Reuters) - Solar companies are likely to report their brightest earnings in a year as the industry emerges from a brutal downturn, but analysts warn aggressive accounting may cast a shadow on the sector's outlook.

The nascent industry has seen its profit margins and sales growth erode in the past 12 months as a glut of supply and a dearth of financing in the industry stunted the business, which had been expanding by more than 40 percent per year.

Still, analysts expect companies such as First Solar Inc (FSLR.O), SunPower Corp (SPWRA.O) and Chinese-based Suntech Power Holdings (STP.N) to report more demand in the third quarter, helped by a U.S. government economic stimulus spending and increased lending by big banks that pulled back in 2008.

Whether that upturn emerges remains to be seen, and some analysts have said a worrying sign began to emerge in recent quarters as cash flow at the companies began to lag behind reported profit. The worry is that such a lag could mean companies are using aggressive accounting and may not be able to maintain their earnings.

"If that continues, your operating results look good, but your tangible cash flow is declining because you're not collecting on your revenues. That's a formula for disaster for any company," said Gordon Johnson, analyst with Hapoalim Securities.

Johnson cited First Solar, whose cash flow from operations was $101 million and $158 million below net income in the first and second quarters, respectively....MORE

You have to analyze the interplay between the income and cash flow statements. Period.