After profiling Trina Solar back in June, I thought it would be worthwhile to look at a competitor in this growing industry.
Suntech Power (STP) is a very similar company making solar panels to generate electricity. The shortage of silicon has been a challenge but it appears there may be relief in sight as production levels are likely to rise in 2008. In the meantime, STP has been fairly pro active in securing contracts with suppliers for the next several years.
Suntech has a few qualities that differentiate it from competitors. For one, the company has developed new technology to use a lower grade of silicon for its panels and is currently retrofitting its production lines to be able to use this new technology. It is expected that these lines will be complete by early 2008 and will hopefully create an 800 basis point increase in gross margins. The company made an acquisition last year buying Japanese MSK which makes construction materials with solar cells implanted. This could provide a very effective distribution method and allow the company to recognize even greater margins by selling to the primary end user.
MSK is partly to blame for the disappointing earnings number for Q1. The company only earned $0.16 per share when expectations were above $0.20. The shortfall was primarily a function of the company moving MSK from Japan to China where most of its other operations are held. This will cut down on labor costs long-term but is a short term expense hit for now. Also, the company had to buy 72% of its wafers on the spot market as it appears one of its suppliers was not able to deliver on its contract. Spot market prices are significantly higher than current contract prices. The issue seems to be resolved and it is expected that costs will be much more in line for the rest of the year.
While STP is not debt free, it does have a healthy balance sheet with enough cash to be able to make the capital expenditures necessary to continue to ramp production and grow its business. Analysts do not expect the company to have to go to the capital markets to raise cash unless they decide to ramp production more quickly than originally planned. The company spends a great deal on Research and Development, but this has paid off with some of the technological breakthroughs that allow them to compete on an international level.
The entire industry relies on governmental subsidies as solar electricity is still one of the most expensive ways to generate electricity. If governments decide to focus their attention on other areas and do not continue to support alternative energy programs, it could be very difficult for TSL and STP to compete. The stock is not cheap so to invest, one has to buy the story that earnings will continue to ramp at a steady clip. I think it’s likely they will.
FD: Author does not have a position in STP
Additional Reading:
Barrons notes JA Solar downgrade
Solar stocks trading off after First Solar results.
Suntech Power (STP)
July 21st, 2007 at 4:26 pm
i would aviod. you missed the 2 big dips down to lower 30s since Febuary. where have you been? and if you missed it you missed it. dont chase it. let it cool off some and come to you.
July 21st, 2007 at 4:38 pm
i lighten CHIPOTLE thursday in 87s and then did buybuy @ 86+ on friday. it looks like the industry group is going to stay subdued on the stock market over the next few days with either poor or suspicious investor sentiment.
On Friday’s Fast Money then warned the restaurant group is volnerable and Cheese Cake may disappoint on quarterly metrics substainly this coming Wednesday.
subprime, financials, higher gas prices, higher interest rates, declining house values, are multi- point pinching-pressuring the consumer. consumer spending power is wild card. thus skepiticsm is high. if this lingers on CMG a & b until earnings july 31, for the next 7 trading days…. the stock might be lowish with reserved optisism just in front of earnings and get a nice pop on earnings day… if in fact earnings come through. based on robout stunning same store sales in June for mall based Zumiez…. i would say consumer interest, traffic, and Chipotle’s same store sales are going to continue kicking ass. KEY to $150? CHIPOTLE entrees priced in $5s might have value towards $8-$15 vs. competition. Whats a better value a empty Starbuck’s $5 cup of java or all of CMG $5s priced entree? did you know that penetration rate of Chipotles is 50 units in metropolis of Denver? I believe the 50 units are spread out over 2 million people but might be as high as 3-4 million people.
July 22nd, 2007 at 1:23 am
You may be right on avoiding STP. However, I would prefer to buy a stock breaking to fresh new highs on strong volume as opposed to buying on the dips. Yes, you miss some opportunity that way, but you also tend to have a less risky position. Since I often use 10% as a guideline for my stop point, I want to be sure a pullback or consolidation is over before I commit capital.
On CMG I was pleasantly suprised that on a day the DOW was down so much, it didn’t give up much ground. Now I know percentage wise it’s in line or even above the weakness in the indexes, but a growth name like this often magnifies a market loss by 2 or 3 times so yesterday was not too dissapointing.
Thanks for staying in touch.
July 22nd, 2007 at 10:15 am
Instead in my watch list of solar stocks there is SOLF, I was intrigued by the young age of this firm (it commenced the operations the 31 august 2004), so the investment is nearly “venture capital”. Any ideas about this stock, Writer and Readers?
Thanks for the interesting blog
July 22nd, 2007 at 6:08 pm
So what would it take to get you excited for CROCS again?
The 9 day downslope CROX dip 49.70 > 44.00 is -12%
or -$5.70. expecting a deeper dip to buy low?
hoping for upgrades or hiked estimates and price targets
to sell high?
July 22nd, 2007 at 6:12 pm
I think for this name I would want to see a multi-month consolidation building a larger base and shaking out many of the momentum holders. (This is obviously not what you want to see if you’re already long the stock). I’m not saying I expect this, that is just what it would take for me to feel like the potential reward justifies the risk I am taking in this name that has had such a great run and is priced at such a high multiple. I hope for you it keeps moving and I am able to make my money in other names.
July 22nd, 2007 at 6:24 pm
let me explain the perspective on STP.
i believe the nearby 5 year trend is favorable,
came to that conclusion fall 2006, when STP-SPWR were in 6 month selloffs, but the immediate STP pricing is not. you are chasing a 1 month $13+ or 41% bounce thats ripe for profit taking and a tip over, not only that but pulling the trigger in frontt of volitile earnings situation, that better be stellar or this bounce is gonna come crashing down on profit taking, what ego arrogance. the shares have soared 41% on the premise of your tardy realized facts. How much more do you expect? This whole 41% spike has probably be precalculated in Shanghi during May and overcaluclated in New York during June. Enter at end of July? no way. i could be wrong, but this is my style and procedure.
July 22nd, 2007 at 8:00 pm
i totally agree that crocs has a big run and there is more risk.
usually i dont chase these runups. I am breaking the chart rules on CROCS on the premise that although there has been a big run, the phenominal numbers the CROCS company has posted makes the P-E-G ratio slim. the idea of 45 million pair this year, 57 million pair next year is an incredible trend. The world wide shoe market is about 20 billion pairs at about $8 wholesale per unit or $160 Billion. in the second quarter the CROX international sales cranked 441% to $60+ million with a higher gross profit then in the states. this is way ahead of (and more uniquish then) Under Armor, Nike, Coach, and True Religion numbers. i strictly trade this CROCS on the dips. my portfolio cores are more stable cmg-isrg. boris
July 22nd, 2007 at 10:04 pm
crocs extra- something we didnt review… crox has 2 original styles. these 2 styles Beach& Cayman continue to post impressive year over year sales growth despite the cannibalization effect of 18 to 30 (?) new styles. management says that the 2 styles unit sales volumes will not crest for another few years.
March 29th, 2010 at 8:28 am
I was looking for solar related articles this was excellent