Avoid This Solar Stock

I wrote in a previous article about how escalating costs and shrinking prices throttled Hanwha SolarOne's (Nasdaq: HSOL) margins. The China-based energy solutions provider saw a marginal rise in its revenue, but escalating expenses affected profitability in an industry facing weakness due to tepid product demand and subsidy withdrawals in important markets.

Let's take a deeper look at Hanwha SolarOne's fundamentals and examine whether it's worth your money.

Color me unimpressed
While most players in the industry have seen declining revenue, Hanwha Solar's revenue grew marginally in the last quarter, on a year-over-year basis. However, revenue declined a considerable 18% on a sequential-quarter basis as average selling prices of solar products fell. The drop in margins was compounded by spiraling costs as research and development expenses jumped 88% from the year-ago period because of stock-based compensation given to employees. The company didn't provide much insight into its development plans, and it seems like its future is on shaky ground for the time being.

Furthermore, the protests against pollution at JinkoSolar's Haining plant have left investors with a bitter taste. Hanwha may find the going tough. Also, the company's credibility may continue to come under the microscope, as there is always some doubt about the way Chinese companies run their operations and report financials.

Just how skeptical are investors? Take a look:

Source: Capital IQ, a Standard & Poor's company.

Hanwha may look like the most attractive company in the above table based on trailing P/E. However, there's more to it than meets the eye. The first two in the table are Chinese companies, and, as I said, the Haining incident has cast a shadow of doubt on them. Hanwha's trailing P/E may appear cheap, but the valuation starts to look uglier when we consider its possible future. Its forward multiple of almost 30 tells a much different story. The gap between trailing P/E and forward P/E is tremendous and it seems like analysts have doomed Hanwha's growth estimates on the basis of the negative PR and poor quarterly results.

I wouldn't go for such a risky stock at this point in time. If you are looking for some solar action, you may want to consider the two U.S.-based companies mentioned above (SunPower and First Solar), which have displayed significant improvement in their operations lately.

The Foolish takeaway
With negativity all around, it looks like Hanwha SolarOne will have to wait quite a long time before it gains some respectability. The company's recent revenue growth is impressive, but now it all boils down to how it steers itself in this difficult time. I'm going to wait for the next quarterly release to see how things are at Hanwha, and hopefully be in a better position to make a call on this stock then.

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