Suntech Power: Competing For Solar Strength

After profiling Trina Solar (TSL) back in June, I thought it would be worthwhile to look at a competitor in this growing industry.

Suntech Power (STP) is a very similar company making solar panels to generate electricity. The shortage of silicon has been a challenge but it appears there may be relief in sight as production levels are likely to rise in 2008. In the meantime, STP has been fairly pro active in securing contracts with suppliers for the next several years.

Suntech has a few qualities that differentiate it from competitors. For one, the company has developed new technology to use a lower grade of silicon for its panels and is currently retrofitting its production lines to be able to use this new technology. It is expected that these lines will be complete by early 2008 and will hopefully create an 800 basis point increase in gross margins. The company made an acquisition last year buying Japanese MSK which makes construction materials with solar cells implanted. This could provide a very effective distribution method and allow the company to recognize even greater margins by selling to the primary end user.

MSK is partly to blame for the disappointing earnings number for Q1. The company only earned $0.16 per share when expectations were above $0.20. The shortfall was primarily a function of the company moving MSK from Japan to China where most of its other operations are held. This will cut down on labor costs long-term but is a short term expense hit for now. Also, the company had to buy 72% of its wafers on the spot market as it appears one of its suppliers was not able to deliver on its contract. Spot market prices are significantly higher than current contract prices. The issue seems to be resolved and it is expected that costs will be much more in line for the rest of the year.

While STP is not debt free, it does have a healthy balance sheet with enough cash to be able to make the capital expenditures necessary to continue to ramp production and grow its business. Analysts do not expect the company to have to go to the capital markets to raise cash unless they decide to ramp production more quickly than originally planned. The company spends a great deal on Research and Development, but this has paid off with some of the technological breakthroughs that allow them to compete on an international level.

The entire industry relies on governmental subsidies as solar electricity is still one of the most expensive ways to generate electricity. If governments decide to focus their attention on other areas and do not continue to support alternative energy programs, it could be very difficult for TSL and STP to compete. The stock is not cheap, so to invest, one has to buy the story that earnings will continue to ramp at a steady clip. I think it’s likely they will.

STP 1-yr chart

Disclosure: Author does not have a position in STP