Suntech Power Posts Lower Profits - Analyst Blog

Suntech Power Holdings Company Ltd. (STP) posted 18 cents of earnings per American Depository Share (EPADS) in the third quarter compared to 16 cents in the year-ago quarter. However rising silicon wafer costs and weaker selling prices led to Suntech posting lower profits in the quarter compared to the Zacks Consensus Estimate of 23 cents per EPADS.

Operational Results

Suntech registered total net revenues of $743.7 million, an increase of 19% from $625.1 million in the second quarter of 2010 and an increase of 57.2% from $473.1 million in the third quarter of 2009. Total photovoltaic (PV) products shipment increased 25.3% over the second quarter of 2010 and 107.1% year-over-year. Revenues in the reported quarter also comfortably beat the Zacks Consensus Estimate of $697 million.

In the reported quarter, Suntech's gross profit was $122 million and gross margin was 16.4% compared to gross profit of $113.9 million and gross margin of 18.2% in the second quarter of 2010. The sequential decline in gross margin was primarily due to a small decrease in the average selling price, and a marginal increase in the cost of silicon wafers used for production.

Operating expenses for the reported quarter decreased to $59.5 million compared to $132.9 million in the second quarter of 2010. As a result, Income from operations was $62.6 million compared to a loss from operations of $19.1 million in the second quarter of 2010.

The company boosted by the appreciation of the euro versus the US dollar gained $42 million in the reported quarter compared to a foreign exchange loss of $61.4 million in the second quarter of 2010. Overall, the company recorded a net income of $33.1 million compared to a net loss of $174.9 million in the second quarter of 2010 and net income of $30.2 million in the year-ago quarter.

Financial Condition

Suntech reported cash and cash equivalents of $946.2 million, compared with $765.6 million as of June 30, 2010. The increase in cash and cash equivalents was mainly due to excellent working capital management. In the third quarter of 2010, capital expenditures, which were primarily for the addition of new production equipment, totaled $137 million. The company at the end of the reported quarter had outstanding long-term bank borrowings of $159.6 million and convertible notes worth $543.3 million.         

Outlook

Wuxi, China-based Suntech is a leading solar energy company. The company designs, develops, manufactures and markets photovoltaic (PV) cells and modules. In the reported quarter, shipments and revenues were a company record. The company was also able to raise the annualized solar cell and module production capacity to 1.6 GW, and expects the annualized capacity to reach 1.8 GW by the end of fiscal 2010.

Looking forward in the fourth quarter of 2010, Suntech expects at least 10% sequential growth in shipments and targets to ship more than 1.5 GW of solar products in 2010, representing a year-over-year growth of at least 113%.

Suntech Power is one of the largest producers of PV solar modules under its proprietary Pluto technology with a geographically-diversified customer base. The company is in the process of acquiring a 375 MW of ingot and wafer slicing capacity in China. Suntech expects the acquisition to enable the company to reduce its cost and improve profitability.

Other positive factors for Suntech include ongoing expansion programs, higher conversion efficiency through its Pluto technology-enabled modules, subsidy program in China, and improving operating efficiencies. However apprehensions over rising competition, subsidy cuts in Europe, and financial stability of its customers overshadow the positives.

Our Neutral recommendation on the stock indicates that it would perform in line with the broader market. In the near term we believe its Zacks #1 Rank (Strong Buy) peers like JA Solar Holdings Co. Ltd. (JASO), LDK Solar Co. Ltd. (LDK) and ReneSola Ltd. (SOL) are more promising compared to the Zacks #3 Rank (Hold) Suntech Power.

 
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