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Suntech: Price Target Lowered

Tickers in this article: STP
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (Trefis) -- Suntech Power(STP) reported a decline in volumes and margins in its fourth-quarter results last week.

The company reported a net loss of $1 billion for the year, largely because of a $462 million charge it took in third quarter and because of other settlement charges and expenses. Other solar companies like Trina Solar(TSL) and First Solar(FSLR) have also booked significant losses after being hit by falling margins and write-downs. Suntech management expects moderate growth in sales volume in 2012, but warned that panel sales may fall by 30% in the first quarter.

We have revised our price estimate for Suntech Power from $4.50 to $3.50, a premium of over 25% to its current market price, in light of these results and the near-term outlook for the industry.

Click here for our full analysis of Suntech Power.

Suntech reported gross margins of around 12.3% in 2011. Margins fell to about 10% in fourth quarter and are expected to fall further to about 3% to 6% in first quarter of 2012 as demand weakens further.

The panel manufacturer warned that panel sales could drop by almost 30% in first quarter as Germany and other European nations cut down on solar subsidies. However, according to the company's forecasts, total panel sales for the year may be between 2.1 to 2.5 GW. The company managed to sell about 2.1 GW of capacity in 2011.

Panel manufacturers have been forced to cut prices drastically over the last few quarters in response to falling demand as governments in the E.U. have cut down on support to solar energy. Price cuts have resulted in industry-wide margin compression as most manufacturers are reporting growing volumes without any increase in profitability.

Suntech's CEO remained hopeful that sales from markets like the U.S., India, China and Japan could help offset lower demand from European markets. Germany, the world's largest market for solar panels, plans to cut down capacity additions this year by more than half to about 3 GW. This development could further delay a recovery in panel pricing as the industry continues to grapple with overcapacity.

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