Suntech Power: Compelling Valuation but May Drop in Market's Corrective Mode

| About: Suntech Power (STP)

If you don't think that investing in the stock market is a lot like high-stakes gambling, then perhaps a look at the short trading history of Suntech Power (NYSE:STP) may change your mind. The equity went public in late 2005 when shares were sold at $15 to much fanfare, like many IPOs. They really tore it up for two years and, in late December 2007, it reached a price very close to $90/share. That same year the stock earned $1.02/share and had a book value of only $5.80/share. It's earnings gave it a P/E ratio of 90, extremely high by any standards. Investor psychology had kicked in and the stock was swept up with two investing frenzies at that time, renewable energy and Chinese securities.

They say to never get between a man and a firing squad and buying a stock with a P/E of 90 is just about the same thing. After the market imploded in late 2008, investors slammed the door shut on Suntech Power and it traded at $5.50. Ouch. It had a small revival in 2009, getting as high as $21, but has been sucking wind ever since and now goes for close to $8. It barely beat the widowmaker. However, this is not the end of the story with this security.

What jumped off the page while examining its metrics is that it now trades at a P/E Ratio of only 9 with 2011 consensus earnings at $.84/share according to Yahoo Finance. It's book value is $10.55/share, considerably higher than the current price and twice as much as when it was at its all time high. So what's wrong with this picture? Well, if the stock was so great at $90 with a P/E Ratio of 90 and, a book value of $5.80, why is it being shunned by selling at $8, especially if it's going for such a big discount? I've never been able to figure this out which is what makes investing so interesting.

Sure, Suntech Power has some serious question marks, but, it may just meet your investing criteria, especially if you are a bargain hunter. One big thing I like about them is that they are a leader in their industry. This is confirmed in a May 31st, 2011 Standard & Poor's report by Angelo Zino: "Suntech Power was the world's largest manufacturer of photovoltaic (PV) cells at year-end 2010 ... PV cells are devices made from silicon wafers that convert sunlight into electricity by a process known as the photovoltaic effect."

ValueLine's Warren Thorpe takes this a step further in his April 1st, 2011 analysis when he discusses Suntech's plans for next year: "Cost reductions should materialize in the coming quarters. Cell and module processing expenses are all on the decline and the cost of producing wafers should begin to fall in tandem. If the company's in-house projections for their layouts come to pass for 2012 ... Suntech Power will be one of the top low-cost producers of photovoltaic devices in the world." It appears that they have their bases covered, so let's look at the industry as a whole.

In a fact sheet provided by solar industry research firm SolarBuzz: "The 2010 global solar photovoltaic market size soared past the forecasts of the previous year, allowing prices throughout the PV chain to hold up much better than anticipated. Worldwide PV market installations reached a record high of 18.2 GW (gigawatt) in 2010, representing growth of 139% Y/Y (year over year). The PV industry generated $82 billion in global revenues in 2010, up 105% Y/Y from $40 billion in 2009. Meanwhile, worldwide solar cell production reached 20.5 GW in 2010, up from 9.86 GW in 2009."

The increase in the number of PV gigawatts utility companies will be generating in the coming decade paints a picture of robust growth. China and India are two nations that have ambitious solar energy plans. In examining an Asia/Pacific factsheet from SolarBuzz, we can see that in 2009 China generated a minuscule 228 megawatts of solar energy and India's output was a microscopic 44 megawatts. However, India's Ministry of New and Renewable Energy released its National Solar Mission, outlining planned growth of the PV market to 20-22 GW by 2022. This pales compared to what China wants to do.

In the May 25th, 2011 Suntech Power 2011 Q1 conference call, Chief Commercial Officer Andrew Beebe reports: "We're particularly excited about the long-term potential of the Chinese solar market. A senior official of the highly influential National Development and Reform Commission recently stated that China's 2020 solar target would be increased from 20 gigawatt to 50 gigawatt. But this is not official policy." Since they are starting at basically zero, anything over 20 GW is a significant jump and, let's not forget that Suntech Power is a Chinese company based in Wuxi, China.

I believe they would have an inside track on government contracts. Think locally, act globally. It works both ways. They don't have a "Buy American" campaign going on in the PRC. I guarantee you that. As is, China only constituted 5% of Suntech's revenues in 2010. There's plenty of room for growth domestically, let alone spanning an entire globe that looks to be slowly weening itself off of fossil fuels and nuclear power.

In looking at the Suntech Power annual report, the company warns investors that: "Demand for our products depends substantially on government incentives aimed to promote greater use of solar energy ... Governments in many of our key markets, most notably Italy, Germany, Spain, the United States, France, South Korea, Taiwan, India, Japan and China have provided subsidies and economic incentives to encourage the use of renewable energy such as solar ..."

The shaky economies of these countries, especially in the developed world, may be a smoking gun in regards to potential growth slowing. However, I believe that renewables are here to stay and that although anticipated growth may decrease somewhat if there is indeed some sovereign belt tightening, we're just in the early innings of this industry. Suntech Power could very well maintain their leadership position and offer you boundless profits going forward, especially when it's selling for 20% under book value. The question still remains, is this the right time to buy a stock like Suntech Power?

In going back to Andrew Beebe and the 2011 Q1 conference call, he states specifically that, "... the next two to three quarters will be challenging." Much of this has to do with an oversupply in the industry. Semiconductors are a boom and bust business. Solar wafers are no exception. According to analyst opionion on Yahoo Finance, a majority of them think you should keep your powder dry when it comes to Suntech Power. Out of the 41 analysts that cover the stock, 22 have a hold rating while 10 rate it a buy or strong buy and, 9 have a negative opinion of it. That's not a strong endorsement.

Normally, I would take a flier on a market leader in a growth industry with a valuation so compelling. However, I believe we are still in a corrective mode in the market and although it may not drop like it did in late 2008, there is still too much debt in the system. That's why I'm in cash and have positions in both ProShares UltraShort S&P 500 (NYSEARCA:SDS) and Direxion Daily Small Cap Bear 3X Shares (NYSEARCA:TZA). I've made my bets that the market is going lower and Suntech Power with it.

Disclosure: I am long SDS, TZA. I am short the market and also hoarding cash.