What a day to be a rebel. Motley Fool Rule Breakers pick and Chinese solar energy supplier Suntech Power (NYSE:STP) reported a 174% year-over-year improvement in revenue in its first quarter, well ahead of the 154% investors were expecting.
Such outrageous growth rarely lasts. But, in Suntech's case, there's reason to remain optimistic. Or at least, that's how management sees it. Quoting Dr. Zhengrong Shi, Suntech's chairman and CEO, from the press release: "...We already have firm purchase contracts in place for our entire 2007 projected output, which is notable given that this volume is more than double our 2006 output. In fact, we are already receiving purchase orders for 2008."
The balance sheet backs up his claim. Accounts receivable skyrocketed by nearly -- wait for it -- 3,000%. Inventory, meanwhile, was up 208%.
Such aggressive use of working capital usually isn't cause for celebration. I'm not sure it is here, either. Suntech has taken on more than $800 million in total debt to fund growth. Nevertheless, the point remains: Demand for Suntech's photovoltaic cells has outstripped supply, and management is running to catch up.
And catch up they will. With more raw materials, Suntech has upped its full-year production capacity from 390 megawatts (MW) to 480 MW. (Photovoltaic cells are measured by their ability to convert sunlight into usable watts of electricity.) That, too, bodes well for future growth.
But growth alone isn't enough. Just ask the investors in Evergreen Solar (NASDAQ:ESLR). For Suntech, expansion is proving to be costly. Margins fell by double digits when the firm was forced to take on higher-priced inventory to meet demand.
Management says the problem is fixed and that it has all the silicon it needs for the rest of the year, which should lead to a return to above-average margins. Let's hope so. Growth is great, but not growth at any price.
Bask in the glow of related Foolishness:
• How was our Foolish forecast?
• Suntech wants to raise the roof.
• Being bullish on America couldn't hurt, I suppose.
Suntech Power is part of the market-beating Motley Fool Rule Breakers portfolio, which contains seven stocks that have more than doubled. Intrigued? Click here to test-drive the service for 30 days. There's no obligation to subscribe.
Fool contributor Tim Beyers, who is ranked 6,458 out of more than 29,300 in CAPS, is a sucker for growth stocks and a regular contributor to David Gardner's Rule Breakers team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Tim's portfolio holdings can be found at his Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy went to the beach over the holiday weekend to take in some sun.
