- NEW YORK (AP) -- Shares of solar cell maker Suntech Power Holdings Co. Ltd. edged up in premarket electronic trading Friday after a Jefferies & Co. analyst initiated coverage with a "Buy" rating, saying the company's Pluto technology will allow it to keep costs down.
- Paul Clegg set a price target of $45 per share, a few cents above the all-time high the stock set in July.
- Clegg expects Suntech to introduce Pluto technology next year. The company says the technology is less expensive to make than competing technologies, and also more efficient at converting solar energy into electricity.
- "The company has developed a good overall reputation for quality modules at a reasonable price and continues to develop additional means of improving product quality and per unit economics through both better manufacturing and conversion efficiency gains," he said.
- Clegg said Suntech has a history of exceeding production estimates. He said that trend should continue, and the company should beat analyst expectations for the year. He expects a profit of $1.13 per share this year, and far surpass Wall Street estimates by earning $1.78 per share next year.
Takeaway: With the recent run in Chinese stocks, many now trade at valuations higher than their US counterparts. One can argue with the accounting standards in China, this might be an iffy proposition. I believe what many see as a 'not so expensive' Shanghai market, might look a lot more expensive if companies there universally used internationally accepted accounting standards - from many things I have read there is a lot of chicanery going on, but we can leave that for another day, and another bubble. I don't have such concerns with this solid company - they are the best capitalized, best managed, heaviest R&D spender, best connected Chinese PV solar player. Due to the quite large float, and larger share count (vs peers) Suntech Power gets left behind by the retail crowd since daytraders and momentum guys cannot push a stock like this up 40% in a week; but I believe as institutional interest increases in this sector they are going to be pushing themselves in the names that have some liquidity, and Suntech Power is the obvious choice.
The major US peer to Suntech Power is SunPower (SPWR). Let's compare the valuations:
Suntech Power (STP) $39
EPS 07: $1.01
EPS 08: $1.59
PE on 07: 39
PE on 08: 24.5
SunPower (SPWR) $82
EPS 07: $1.18
EPS 08: $1.96
PE on 07: 69
PE on 08: 42
So Sunpower, the US counterpart to STP trades at over 70% of its value - both companies have similar market caps and similar growth rates - Suntech Power actually has better margins across the board. With the market now 'marking up Chinese merchandise' to levels above US merchandise (for example CNOOC (CEO) is now valued higher on PE multiple than Exxon (XOM)), why such a discrepancy here?
One can argue if it makes sense for Chinese coutnerparts to trade at par or even higher values than US - there are good arguements both pro and con - but certainly in this sector we do not see that. So if this inefficiency is closed, we should see a nice ride up on Suntech Power despite its premium valuation. I am looking for a run to upper $40s by Q1 2008 - if we get more clarity on the polysilicon shortage issue in the upcoming months, it could be even quicker than that. For the longer term, much like the analyst I believe 2008 estimates are probably understated and if this shortage begins to clear up by latter 2008, earnings leverage will explode as polysilicon is 65-75% of costs for many of the Chinese PV makers.
Long Suntech Power, Ciena in fund; no personal position
