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PDFYes, Suntech beat revenue expectations for the first quarter and even raised its production outlook for the rest of the year. But the company also encountered multiple headwinds that left investors in a rather dark mood.
As expected, Suntech suffered a big hit from the falling Euro that triggered a rare earnings miss. Even worse, the company reported glitches with the breakthrough technology that’s supposed to fuel its future sales. Meanwhile, the company still hasn’t collected the cash for deals inked by the Global Solar Fund (GSF) – a mysterious firm that it largely controls – more than a year ago.
Despite Suntech’s promises of a bright and glorious future, the company’s stock wound up sliding almost 7% following last week’s quarterly update. (It has fallen 15% since TheStreetSweeper first highlighted risks associated with the company three weeks ago.) At $9.06, the stock is now sitting near the bottom of its wide 52-week range of $9.02 to $21.38 a share.
But Hapoalim Securities analyst Gordon Johnson believes that Suntech could fall even more. With Suntech’s cash and short-term investments tumbling by one-third to $667 million in the recent quarter – and the company’s upcoming payment obligations totaling $1.6 billion – Johnson foresees a possible liquidity crisis ahead.
“STP may face liquidity issues as early as this year,” Johnson cautioned after reviewing the company’s latest financial statements. And “we do not believe this is widely known.”
With a “sell” recommendation on Suntech, Johnson continues to steer his own clients away from the company’s stock. In the meantime, he has gone ahead and slashed his target price for Suntech from $9 to a new Street low of $6 a share. Several other analysts cut their price targets for Suntech following last week’s update as well.
Distant Pluto
To be fair, the entire solar sector has sold off in recent weeks because of falling Euro rates and looming subsidy cuts for European projects. But Suntech faces additional risks that its competitors do not.
For starters, Suntech has dramatically scaled back production forecasts for the new high-tech “Pluto” solar panels that were supposed to shape the company’s future. Just three months ago, Suntech told investors that Pluto was “performing extremely well in large-scale production” and that the company expected to ship 180 megawatts worth of Pluto capacity over the course of the current year. Last week, however, Suntech suddenly announced that the company had encountered production glitches and cut its forecast for 2010 Pluto shipments to around 50 megawatts – a 130-megawatt shortfall – instead.
“This will significantly limit STP’s ability to offer something different than its peers,” Johnson observed, “which had been among the key reasons to invest in STP” going into the second half of the year.
Meanwhile, Suntech is still waiting for GSF – a joint-venture 97% owned by the company and its CEO – to come up with more than $100 million for solar modules that it booked as revenue back in the first quarter of last year. Since then, in a move the struck many as curious, Suntech decided to invest an estimated $72 million of additional funds in GSF last quarter despite that lack of payment.
Although Suntech recently described its investment in GSF as a “brilliant idea” that promises a “stable stream of revenue,” some industry experts clearly have their doubts.
“Why would you give GSF more money today?” Wells Fargo analyst Sam Dubinsky asked during last week’s conference call. “Wouldn’t you want to seem them be successful on a project first before you put more money into them?”
Cash Crunch?
Suntech’s partnership with GSF has in fact already paid off in one important way.
Thanks to Suntech’s big sales to GSF – which accounted for almost one-third of its revenue in the first quarter of last year – the company managed to meet Wall Street growth expectations and quickly follow up with a secondary stock offering that allowed it to avoid a potential liquidity crisis. One year later, however, Suntech faces a possible shortfall once again.
Suntech’s latest financial report offers clear reasons for concern. Cash and cash equivalents fell from $833 million to $677 million, with the new GSF investment apparently causing about half of that drop, during the past three months. Liquid short-term investments, which previously totaled $200 million, disappeared entirely. Accounts receivable jumped from $384 million to $468 million, even though the outstanding balance due from GSF actually fell due to the declining Euro. Meanwhile, accounts payable jumped from $264 million to $384 million during the same period.
If Suntech’s receivables and payables had held steady, the company’s cash balance would look even worse. Without those changes, Suntech’s total liquidity (including cash and short-term investments) would have dropped by more than half to just $473 million over the course of the past three months.
Even with its higher cash balance, however, Suntech could still need additional money to pay its looming bills. First and foremost, Johnson noted in his recent report, Suntech owes $1.3 billion for raw materials that it ordered under “take-or-pay” contracts coming due later on this year. Meanwhile, Johnson said, Suntech needs to come up with another $308 million for capital expenditures and debt payments as well.
Due to the “significant cash burn experienced this quarter … and the $1.6 billion in 2010 obligations,” Johnson cautioned last week, “we see liquidity as a major concern.”
Bear Claws
In fairness, Johnson ranks as perhaps the most bearish Suntech analyst who follows the company’s stock. Still, even those with a more favorable view of Suntech now see new reasons for alarm.
They worry about falling prices for Suntech’s solar panels in particular. Historically, Suntech has enjoyed premium rates for its solar modules. Last quarter, however, Suntech saw the average selling price (ASP) for its products drop by 14% -- worsening a recent trend – even though the company had previously predicted that those rates should hold steady, or even rebound, instead.
Other solar companies reported much smaller price decreases, Oppenheimer analyst Gary Hsueh observed, and attributed those cuts entirely to the falling Euro.
“Admittedly, STP still maintains its ASP premium,” Hsueh wrote last week. “But due to execution issues on high-efficiency Pluto cells, the company’s historical premium is being whittled down.”
Suntech’s gross margins stacked up poorly against those reported by its competitors as well. Suntech posted 22.1% gross margins on its core products, but its overall margins came to just 19.5% because of the negative margins on its remaining business lines.
Even without the drag caused by those noncore businesses, however, Suntech would have posted much weaker margins than those enjoyed by some of its peers. Trina (NYSE: TSL) reported a gross margin of 30.9% for the first quarter, Raymond James analyst Pavel Molchanov noted, while Yingli (NYSE: YGE) posted an even higher gross margin of 33.3% for the same period.
With market-perform ratings on Suntech, both Molchanov and Hsueh have expressed lukewarm views on the company’s stock. So has Macquarie analyst Kelly Dougherty, who is steering solar fans toward Trina and other competitors – including STR Holdings (NYSE: STRI), First Solar (Nasdaq: FSLR), SunPower (Nasdaq: SPWRA) and JA Solar (Nasdaq: JASO) – instead.
“STP is currently the most expensive Chinese stock in our solar coverage universe,” Dougherty explained last week. “Due to its much higher valuation, less integrated business model and somewhat less transparent management team, we expect the stock will underperform most of its Chinese peers in 2010.”
With Suntech, he told investors, you are “not necessarily getting what you pay for” when you could enjoy “more bang for your buck” by choosing other Chinese solar stocks instead.
* To contact Melissa Davis, the author of this story, please send an email to editor@thestreetsweeper.org.
