Suntech Power Adds to the Solar Industry's Gloom

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Solar products manufacturer Suntech Power (NYS: STP) succumbed to the ongoing weakness in the solar industry as it reported wider-than-expected losses in its second quarter despite a surge in revenues. Its shares closed the day almost unchanged.

Let's take a look at how the company may perform over the course of the year.

A look at the quarter
Revenues for the quarter surged 33% to $830.7 million from $625.1 million a year ago, but slipped 5% on a sequential-quarter basis. The company beat analysts' revenue estimates of $800 million as shipments of its photovoltaic products surged 48% year over year. However, Suntech failed to convert those incremental revenues into profits as subsidy cuts in Germany and Italy -- the two key markets for solar products -- pulled average selling prices lower.

Suntech swung to an operating loss of $50.3 million from a profit of $60.5 million a year ago, which excluded one-time expenses of $120 million associated with the termination of a wafer supply agreement with MEMC Electronic (NYS: WFR) .

A look at the books
Suntech reported a minor increase in inventory in the quarter on a sequential basis. This bodes well for the company as its shipments are still strong despite the weakness in demand. Peer JA Solar (NAS: JASO) , meanwhile, saw its inventories surging 31% in its just-concluded quarter.

However, the most alarming point is a very high level of debt. Suntech has a total debt of $2.4 billion, of which $1.6 billion is short-term. This is certainly alarming for a company whose total market capitalization is around $900 million. Suntech needs to boost its cash flows, which are currently in the red, if it is to service its debt more comfortably.

The road ahead
Considering the slowdown that the industry is experiencing, I do not see an end to Suntech's woes anytime soon. Even though the solar panel maker is looking to develop its capabilities and has spent considerably on research and development to offer efficient products, it may not be able to escape the curse of falling prices. Nearly 52% of its revenues come from the European market, which is anything but stable, and this may hold the stock back from performing well in the near term.

The Foolish bottom line
Suntech has downgraded its revenue guidance for the rest of the year even as it continues to see increased shipments. I would wait to see when (or even if) the industry begins to show some signs of life. Till then, you can keep an eye on the stock by adding it to My Watchlist.

At the time this article was published Fool contributor Harsh Chauhan owns no shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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