SunPower Hits the Cost Hurdle in Q2


The gloomy trend in the solar energy industry continued to weigh on solar product companies with panel maker SunPower (NAS: SPWRA) reporting wider-than-expected second-quarter losses. Its shares fell more than 3% as escalating expenses hurt its operations.

Let's take a look at the factors which are driving the company down.

A look at the quarter
Revenues for the quarter jumped 54% to $592.3 million from $384.2 million a year ago mainly due to an increase in sales of its "Utility and Power Plant" offerings. However, the main catch lies in the costs. Overall costs rose primarily due to higher costs of revenues, which surged by a staggering 88% to $556.9 million. Subsidy cuts in the European market, primarily Italy and Germany, affected margins as average selling prices fell. These factors weighed on the operating margins, with operating loss ballooning to $57.7 million in the quarter from $1.7 million in the year-ago quarter.

Industry blues
A fall in average selling prices of solar products has weighed on the solar power industry this year. Many of SunPower's peers have either just managed to remain in the green or, in some cases, have filed for bankruptcy, as is the case with Evergreen Solar. The U.S. company suffered due to the weakness experienced by the industry and failed to control rising costs. Even ReneSola (NYS: SOL) , a company with a competitive cost structure, managed to keep its head just above the water by reporting a slender profit.

SunPower's weak earnings come as no surprise amid the weakness that the industry is experiencing.

Damage-control measures
The company, for its part, has initiated steps to control costs. It has now shifted its energies toward the North American market to counter the weakness in Europe by deciding to set up a factory in Mexico. It has also entered into an agreement with the environmental group Sierra Club, under which it will set up a 250-megawatt solar ranch in California. However, only time will tell how effective these steps will be. SunPower had to slash prices by 5% to 10% in key markets. At the moment, I'm concerned with the quarterly losses.

The Foolish bottom line
It seems as if difficult times are ahead for SunPower as it grapples with climbing costs, and it won't find a way out until it addresses those problems. Moreover, a weak solar power industry is not helping SunPower's case. I'm skeptical about this stock for the time being, as the company's woes could easily continue for at least the rest of the year.

To keep track of how the company comes to terms with its cost woes, add it to My Watchlist.

At the time thisarticle was published Harsh Chauhan doesn't own any shares in 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.

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