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The solar sector has had an amazing run. It is one of the best-performing sectors in the market, with the sector ETF, the Guggenheim Solar ETF, up over 140% year-to-date.
While peers like SunPower (NASDAQ: SPWR ) have outperformed by yielding 480% year to date, Chinese solar companies Suntech Power (NASDAQOTH: STPFQ ) and LDK Solar (NASDAQOTH: LDKYQ ) are seriously lagging the market. Year to date, LDK Solar is up 5% while Suntech Power is down 11%.
Reasons to be avoid the two laggards
LDK Solar is a company with very little hope. The company has gross margins of negative 46% and quarterly year-over-year revenue growth of negative 51%. To make matters worse, LDK Solar has one of the highest debt loads in the solar industry with $2.6 billion in debt, and earlier this year defaulted on $23.8 million in convertible debt that matured on April 15, 2013.
The problem with LDK Solar is that the company spent a great deal of money to build a 15,000-ton polysilicon factory that is now uneconomical because of falling polysilicon prices. The production cost for LDK Solar's polysilicon is $30/kg, while the current spot price for polysilicon is only $18
With its high debt load, low stock price, and falling revenue, LDK Solar is in a vicious negative feedback cycle that is almost impossible to escape. Because of its dire financials, the company cannot raise money to grow out of its current situation. Meanwhile, competitors with positive margins and a lower cost of capital capture what is left of LDK Solar's market share.
In terms of hope, Suntech Power is not doing much better. Like LDK Solar, the company has negative margins and negative growth. Suntech Power defaulted on some of its debt by missing a payment on $541 million in debt in March 2013. Its main subsidiary, Wuxi Suntech, has approximately $1.75 billion in debt and possibly only $500 million in assets.
Suntech Power is currently awaiting a bankruptcy restructuring ruling on Dec. 20 that will likely leave shareholders with little to nothing.
SunPower is a better investment
In my opinion, SunPower is the best company in the solar sector. It has the most efficient solar panels in the industry with 24% efficiency. Its panels also degrade the least with 0.25% degradation per year, compared to the industry average of 1.3% per year.
With its high-quality solar panels, SunPower is one of the leaders in the rooftop panel market. The company holds a 22% share of the residential market and an 11% share of the commercial market.
The rooftop market is currently growing over 40% year over year and is likely to continue growing at a torrid pace as solar energy reaches grid parity in more places.
The bottom line
The solar sector has rallied, but the rally has left LDK Solar and Suntech Power in the dust. The market is saying that the future of these two companies is dire and very likely to be unprofitable. In my opinion, investors should avoid LDK Solar and Suntech Power and stick with the leaders in the solar sector such as SunPower.
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