A Careful Look at Suntech (STP)

| About: Suntech Power (STP)

Suntech Power Holdings Co Ltd (ticker: STP) is a global supplier of photovoltaic (PV) cells for solar power applications. Photovoltaic refers to the process of taking light and creating electricity ("photo" and "volt" - no those are not precise Latin roots, but you get the point), and Suntech uses silicon wafers to make specialized semiconductors that do precisely that.

The company is based in Wuxi, China, which allows them not only to keep costs down in comparison to other players in the industry, but they also are right smack in the middle of one of the fastest growing economies worldwide.

Since the company's IPO late last year, Suntech's stock, along with the rest of the alternative energy / solar power industry, has seen a tremendous amount of volatility. Besides the fact that solar power stocks are seen as speculative (and speculative stocks tend to be more volatile), the volatility stems largely from the craziness that's been going on in the oil and gas industry. Solar and other alternative energy stocks are strongly tied to oil and gas and - when oil and gas creep up, investors see more potential for alternative energy sources as a feasible replacement energy source. Likewise, when crude takes a dip so does the seemingly bright future for the solar energy stocks.

Well, if you haven't tapped into Suntech in one of it's multiple deep pull-backs so far, now is not a bad time to do it. In general, I have not yet started to value comapanies on their estimated 2007 earnings, but due to the high growth in Suntech and the rest of the industry, it makes more sense to use '07. Currently, analyst consensus has the company pulling in $1.17 EPS in 2007. 5-year growth estimates, which I generally use for calculating my PEG ratios, are at 86% for Suntech according to Yahoo! Finance, a bit higher than I'm willing to buy. But even taking a much more conservative 30% 5-year growth rate and applying a 1.25x PEG to it (which means 1.25 * 30 * 1.17 EPS) you get to a $44/share valuation for the stock. Even at a more conservative 1.0x PEG, you arrive at $35/share, just under the current $35.70 price tag.

Of course valuation is not the only reason that this stock is worth a hard look. The industry is one that is taking off and, at least for now, bolstered by government subsidies there is a lot of room for these companies to really get themselves established. And while companies like SunPower (ticker: SPWR) which trades at 65x '07 estimates and Evergreen Solar (ticker: ESLR) which is not even going to be profitable in '07 may get a lot of the hype and the high valuations, Suntech has become one of the largest and most profitable global PV providers and has margins that blow SunPower and certainly Evergreen Solar out of the water.

Some of the lower multiple on Suntech is due to the fact that they are based in China, which is currently looked at as the Wild West of investing. The political climate could be considered a little questionable, and there are a great number of public Chinese companies that have the Chinese government as the majority holder - especially when combined, this makes things a little iffy. Suntech, though, is a stand-alone entity and has a an extremely qualified and very impressive management team (you can check out the management team on their website). Also, the company was taken public by two very respectable investment banking firms, Morgan Stanley and Credit Suisse First Boston, and is audited by the "Big 4" firm Deloitte and Touche, which I believe gives some additional credence to the story.

Suntech's recent dip into the $34/share range and lower is starting to correct already and will probably make its way back up to $38-40 in the near term. Even if you're looking for something more than a short term trade, at the current price, Suntech likely represents that you could buy and hold in your portfolio for a while.

Fully disclosure: I own Suntech as part of my personal portfolio.