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Both Suntech Power (NYSE: STP ) and Trina Solar (NYSE: TSL ) reported earnings yesterday, and they didn't paint a good picture for two of China's leading solar manufacturers. The companies lost money, which is to be expected, but I'm concerned about the direction both are heading.
Before we get to that big picture view let's look at what the first quarter of 2012 looked like for these two companies.
Module shipments fell 26.9% from last quarter and 22.1% from a year earlier, although it did beat projections. Revenue fell 35% to $409.5 million, and gross profit from those sales was a measly $2.4 million, or a 0.6% gross margin. Net loss for shareholders was $133 million, or $0.74 per share, about a third of the company's market cap.
The U.S. anti-dumping tariff had a cost of $19.2 million in the quarter, or 4.7% of revenue, and if the tariff wasn't in place, margins would have been a little higher than 5%. If shipments increase 20% next quarter, as management expects, gross margin is expected to be a more reasonable 3% to 6%.
For the first time in the company's history, expansion will be non-existent in 2012. Suntech expects to consolidate production into high-efficiency lines and hold pat for now, a good thing for the industry as a whole.
Suntech still has $1.6 billion of net debt and negative cash flow from operations to pay for debt. Eventually that debt load needs to be reduced, and that could determine the future of this investment.
Over at Trina Solar, shipments fell 10.6% quarter-over-quarter to 380 MW, and revenue fell 19.7% to $349.9 million. Even including the impact of the anti-dumping and countervailing duty provisions, gross margin was 5.8%. Net loss was a relatively small $29.8 million and translated to a loss per share of $0.42.
On a cost-per-watt basis, Trina Solar is making steady progress as pressure mounts on module manufacturers. Costs fell $0.08 per watt from the fourth quarter to $0.86, and are down an incredible $0.30 from a year ago. Average sale price has fallen more quickly, resulting in a shrinking gross margin, but Trina is on the leading edge of the cost curve.
On the balance sheet side, Trina Solar is sitting much better than Suntech with $1.1 billion of debt and $748 million in cash.
China heading in the wrong direction
With the industry going through a phase of consolidation and bankruptcies I'm keeping an eye on trends manufacturers are displaying to see who will emerge as a winner in the end. Suntech and Trina are two of my top contenders, along with Canadian Solar (Nasdaq: CSIQ ) in China and two American companies: SunPower (Nasdaq: SPWR ) and First Solar (Nasdaq: FSLR ) .
In recent quarters, we have definitely seen an industry shift toward top-tier manufacturers, leaving companies like LDK Solar, JA Solar, and Renesola in an even worse position than Suntech or Trina. But we've also seen a major shift toward efficiency, as the module itself becomes a smaller percentage of an installation's cost.
When we take these two trends into account and look at gross margins at the top contenders over the last year, you can see that margins are down across the board. But a trend is emerging where First Solar is still losing ground while on the other end of the spectrum SunPower is stabilizing and actually saw gross margin improve in the most recent quarter. What we've seen with Chinese manufacturers is that they're also seeing margins decline quarter after quarter, something that is concerning with so many companies propped up by the government and no sign that any of them will be put to sleep soon.
Q2 2011 Gross Margin
Q3 2011 Gross Margin
Q4 2011 Gross Margin
Q1 2012 Gross Margin
Source: Company releases. *Adjusted for one-time writedowns.
Who would have thought that before massive tariffs were put in place two American companies would be outpacing Chinese manufacturers financially? Anti-dumping tariffs recently put in place will only put more pressure on Chinese manufacturers, even if they can avoid a full impact of the tariffs. Right now I just don't like the direction they're headed.
Foolish bottom line
Until manufacturers start to see a marked improvement in margins and move toward profitability I don't expect the stocks to go much of anywhere. But investors interested in the industry should keep an eye on the emerging trends to identify potential winners in the end. I have put my money on SunPower to emerge from the shakeout because of its improving financials, top efficiency, and backing from Total.
In China, Canadian Solar and Trina Solar would be my top picks, but I'm leery of how the government will handle debt piling up across the industry. However, if you are interested in another energy stock you might want to check out a company our analysts think is well-positioned in the sector. The report is free, just click here.