Suntech Power Holdings Company Ltd. (STP) posted a second quarter loss of 97 cents per American Depository Share (EPADS) compared to earnings of 6 cents in the year-ago quarter. However, results in the reported quarter were affected by non-cash impairment charges and provisions, which reduced EPADS by $1. The Zacks Consensus Estimate was pegged at a profit of 8 cents per EPADS for the reported quarter.

Operational Results

Suntech registered total net revenues of $625.1 million, an increase of 6.3% from $588 million in the first quarter of 2010 and an increase of 94.8% from $321 million in the second quarter of 2009. Total photovoltaic (PV) products shipment increased 11.9% over the first quarter of 2010 and 181.7% year-over-year. Revenues in the reported quarter also comfortably beat the Zacks Consensus Estimate of $586 million.

In the reported quarter, Suntech’s gross profit was $113.9 million and gross margin was 18.2% compared to gross profit of $114.5 million and gross margin of 19.5% in the first quarter of 2010. The sequential gross margin change was primarily due to a lower average sales price as a result of the depreciation of the Euro versus the U.S. Dollar.

Operating expenses for the reported quarter were $132.9 million compared to $51 million in the first quarter of 2010. The increase in operating expenses was primarily due to a non-cash impairment charge for thin film equipment of $54.6 million and a special prepayment provision of $25 million to account for credit risks associated with the delivery of silicon wafers.

As a result, loss from operations was $19.1 million, compared to income from operations of $63.5 million in the first quarter of 2010. The company digested foreign currency exchange loss of $61.4 million, compared to $24.5 million in the first quarter of 2010. The foreign currency loss in the reported quarter was primarily related to the significant depreciation of the Euro versus the U.S. Dollar. Overall the company recorded a net loss of $174.9 million compared to net income of $20.7 million for the first quarter of 2010.

Financial Condition

Suntech reported cash and cash equivalents of $765.6 million compared with $677.2 million as of March 31, 2010. In the second quarter of 2010, capital expenditures, which were primarily for the addition of new production equipment, totaled $92.6 million. The company at the end of the reported quarter had outstanding long-term bank borrowings of $142.7 million and Convertible notes worth $531.8 million.

Outlook

Wuxi, China-based Suntech is a leading solar energy company. The company designs, develops, manufactures and markets photovoltaic (PV) cells and modules. Looking forward, Suntech expects shipments to sequentially increase by 15% – 20% in the third quarter of 2010. Consolidated gross margin in the third quarter of 2010 is expected to be in the mid to high teens, which is based on an assumed exchange rate of $1.29 to the Euro.

Due to continuing strong demand, Suntech has increased its 2010 shipment target from 1.3 GW to 1.5 GW, which is more than double the total shipments for 2009. Suntech is targeting 1.8 GW PV cell production capacity by the end of 2010. Due to the capacity expansion, Suntech now expects capital expenditures of approximately $300 to $350 million in 2010, compared to $200 million previously. Suntech intends to fund the additional capital expenditures with cash on hand, operating cash flow, and existing credit lines.

Suntech Power is one of the largest producers of PV solar modules under its proprietary Pluto technology with a geographically-diversified customer base. Positive factors include ongoing expansion programs, higher conversion efficiency through its Pluto technology-enabled modules, subsidy program in China, and improving operating efficiencies. However apprehensions over the tepid module demand in Europe, rising competition, and financial stability of its customers overshadow the positives.

Our Neutral recommendation on the stock indicates that it would perform in line with the broader market. In the near term we believe its Zacks #1 Rank (Strong Buy) peers like Real Goods Solar Inc. (RSOL), China Sunergy Co. Ltd. (CSUN) and ReneSola Ltd. (SOL) are more promising compared to the Zacks #3 Rank (hold) Suntech Power stock.

Zacks Investment Research

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