Although the year has been depressing so far for the solar industry, we cannot write off solar stocks on the basis of just one poor showing, especially considering solar energy has the potential to become the next most important fuel that we use in our everyday lives.
Time to examine Suntech Power
The numbers
Although Suntech added to the gloom last quarter, it still boasts an impressive compounded annual revenue growth of 26% over three years. Another encouraging sign is the 50% growth in revenue over the last year despite the slowdown that has engulfed the industry because of subsidy cuts in Germany and Italy.
Declining prices as a result of the slowdown have hurt the company's margins. However, Suntech did well to bump up shipments of its photovoltaic modules from last year. This shows that the company has the potential to return to profitability once the prevailing gloom fades away.
Another important point that cannot be overlooked is that Suntech is among the largest sellers of solar panels in China, one of the fastest-growing markets for solar products. The Chinese government plans to grant 50% subsidies to solar products over the next two years, and Suntech, in all probability, will hammer this advantage home. The company is also gearing up its sales in the U.S., which has emerged as an important area as government policies are likely to accelerate the growth of the industry.
Inventories
The entire industry has been piling up inventories. The following table will show us where the company stands in comparison and how well it has been selling its products.
|
Company |
Inventory Turnover Ratio |
Change in Inventory |
|---|---|---|
| Suntech Power | 5.9 times | 50% |
|
JinkoSolar |
7.2 times | 136% |
|
JA Solar |
9.9 times | 133% |
|
Yingli Green Energy |
4.9 times | 44% |
Source: Capital IQ, a division of Standard & Poor's.
Suntech is doing considerably well when compared to its profit-making Chinese peers as far as both the metrics above are concerned. However, I believe it can achieve a higher inventory turnover than it already has, given the possibilities that lie ahead.
Value
Let's also consider how Suntech is valued when compared to its peers.
|
Company |
TEV/EBITDA |
Trailing P/E |
Forward P/E |
| Suntech Power | 3.3 | 3.2 | 9.9 |
| JinkoSolar | 2.4 | 1.2 | 1.2 |
| JA Solar | 2.0 | 2.6 | 1.6 |
| Yingli Green Energy | 3.2 | 2.5 | 2.7 |
Source: Capital IQ. TTM = trailing 12 months. NTM = next 12 months.
Although the company is comparatively cheap when we look at the first two columns, it is the forward P/E that grabs my attention. Suntech endured a discouraging quarter last time and analysts seem to have taken this into account while estimating next year's earnings. But that's mainly because of the downgraded revenue guidance issued by the company for the year. However, considering the expansionary moves that the company is making, investors could be in for a pleasant surprise.
My Foolish prophecy
Suntech is bruised after a terrible quarter, and investors may be apprehensive about its credentials. However, considering the potential the solar industry holds and the company's presence in key markets in Europe, North America, and the Asia Pacific, Suntech may well turn out to be a pleasant surprise.
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