February 17, 2009, 1:57 pm
Suntech: Another Solar Company At Risk As Prices Tumble
Posted by Eric Savitz
Gabelli & Co. analyst John Segrich today launched coverage of Suntech Power (STP) with a Sell rating and a $5 target price.
Segrich notes that Suntech has emerged as the largest Chinese solar module manufacturer; but he says the company’s stock is likely to underperform as the rapid deterioration of pricing and demand in the solar market continues amid the sharp economic downturn.
For 2009, Segrich expects the company to produce $1.95 billion in revenue, shipping 690 MW, below the company’s forecast of 800 MW or more. Segrich notes that the company’s initial response to the slowdown was to reduce volumes - but he thinks the company will drop prices aggressively in Q1 to increase utilization and maintain market share. Segrich forecasts negative free cash flow for the year of $530 million, with significantly depressed margins, as prices sink. He sees ASPs this year falling to $2.80/watt, down 27% year over year.
Segrich notes that the company has fairly rigid silicon costs, due to the use of “take or pay” contracts with multiple vendors. (I would note that the MEMC Electronic Materials (WFR) last week disclosed that terms of its supply agreement with Suntech have been renegotiated to reduce price.) While those contracts have annual price declines, he says that a recent drop in prices form $450/kg to $150/kg put these contracts “at a disadvantage.” He expects gross margins in 2009 to be well short of the company’s forecast of “not less than 20%;” he’s modeling 13% in 2009 and 15.5% in 2010. He sees EPS breakeven in 2009, well short of the Street consensus of 67 cents a share.
The call is consistent with a number of negative comments on the solar sector today from both the companies themselves and from analysts on the Street:
Canadian Solar Slashes ‘09 Shipment Guidance
Trina Solar Q4 Revs Beat Guidance; Margins Below Target
LDK Solar: Are Street Numbers Way Too High?
Also see from last week: Solar: What Happens When Polysilicon Prices Collapse?
Suntech today is down 71 cents, or 7.5%, to $8.75.
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