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Suntech Power (NYSE:STP) has scheduled its Q2 earnings release for August 22nd. Revenues and margins for solar module manufacturers have dropped due to falling European demand and pricing weakness due to overcapacity. Weakening demand claimed its first victim earlier this week with the bankruptcy of Evergreen Solar (NASDAQ:ESLR). With $1.1 billion in net debt which is almost equal to its present market cap, Suntech will be under pressure to deliver strong cash flow growth through revenue growth and healthy EBITDA margins. Suntech competes with other players in the sector such as First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWRA) and LDK Solar (NYSE:LDK).

We currently have a $10.64 price estimate for Suntech’s stock, which is well ahead of its its present market price, though we are cautious on the stock in the near term based on recent industry events. We will update our numbers following Q2 results.

(Chart created by using Trefis' app)

Can Suntech deliver despite the falling prices?

Suntech, the world’s largest manufacturer of solar modules, has looked to offset the weak pricing in the solar modules market by focusing on the high performance segment. In the U.S. market it launched products based on its Pluto technology that boosts efficiency by almost 10% over traditional printed solar cells. [1] Suntech has doubled its spending on R&D between 2008 to 2010 to develop superior, high performance panels across customer segments. It also offers a best-in-industry 25-year power output warranty on its products that promises customers 6.7% more power generation than the standard industry warranty.

Despite rolling out superior products, Suntech will not be immune to the pricing declines that have seen module prices crash across segments. Competitor First Solar’s Q2 earnings posted a 62% drop on a year on year basis, hit by the cut in government subsidies in the Europe market.

Suntech depended on the European market for 61% of its overall sales in the last quarter of 2010 but was able to significantly cut its exposure to the market in 2011 with about 52% of its Q1 2011 revenues coming from the region. [2] Suntech offset this with growth in North America. It has also looked to target the growing market for solar modules in Japan and China. Our sales forecasts take into account these factors.

(Chart created by using Trefis' app)

Cost reduction needs to be a focus

As Suntech increases sales, it will have to maintain healthy EBITDA margins to deliver profits. Little relief is expected in terms of prices for module manufacturers in the near future, but lower pricing is resulting in higher interest from markets such as India and the Middle East. Scaling of volumes can result in the fixed costs of production being spread across higher sales. Suntech will also have to look for better technology and more efficient production techniques to lower its cost of manufacturing to effectively compete in a low price environment and deliver returns to its investors.

Notes:

  1. Suntech Launches Two High-Performance Solar Products in the Americas, PRNewsWire
  2. 2011 Q1 Earnings Preview, Suntech

Disclosure: No positions

Source: Suntech Power Earnings Preview: Focus On Cost Reduction