Roth Cuts ReneSola (SOL) to Neutral; DG Straegy, OEM Model are Both Negatives

Roth Capital cuts ReneSola (NYSE: SOL) from Buy to Neutral and moves its price target from $5 down to $2.75.

Analyst Philip Shen noted two main reasons behind the move:

• Company investments in DG strategy could hampered near-term growth. While we see LT merits in SOL’s shift in focus to downstream DG customers (SOL is targeting ~50% of total module shipments to the DG market by YE’14), we see downside to profitability and cash flow in the NT. While we acknowledge module ASPs are often more attractive in the DG segment, winning large volume orders can be difficult. This could create headwinds to module shipments and topline growth. Moreover, building out the necessary sales and distribution network to stay close to end customers will likely result in increased opex. We expect this to erode profitability and cash flow during 2014/2015. We believe that SOL is de-emphasizing its manufacturing capabilities while it shifts its focus downstream via an integrated product offering, including inverters, racking, storage, and LEDs, the analyst commented.

• The company's OEM business model creates a material drag on gross margin. Shen noted, We see three primary benefits to SOL’s outsourcing strategy: (1) the ability to add capacity with minimal capex required; (2) flexibility in the event of adverse global tariffs; and (3) downside protection of a more nimble manufacturing footprint if this cycle comes to an abrupt end. These benefits, however, come at a cost. SOL’s OEM strategy creates a drag on GMs given the higher costs associated with outsourcing module production. SOL posted Q1’14 GMs of 10.6% vs. peer average of 18.5%.

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