China-based Suntech Power Holdings (NYSE: STP) is slated to report its third-quarter earnings results ahead of the opening bell tomorrow, and the solar stock looks particularly vulnerable to a post-report drubbing. Sector peer JA Solar (NASDAQ: JASO) fell to an all-time low last week after offering a weak outlook, while Trina Solar (NYSE: TSL) today lowered its revenue forecast for 2008.
Currently, First Call reports that analysts are expecting STP to report a quarterly profit of 42 cents per American depositary receipt. Suntech has a respectable history in the earnings spotlight, having exceeded the Street's forecast in three out of its past four reports.
On the plus side, it seems as though many brokerage firms have already downwardly revised their expectations for STP. There have been 10 cuts to the firm's average 2008 earnings-per-share estimates, compared to just two increases.
Plus, several analysts have issued bearish notes on Suntech in the past few weeks: Jefferies & Co. cut its price target on November 17; JPMorgan Chase cut the stock from "neutral" to "underweight" and lowered its price target on November 16; Raymond James downgraded STP from "strong buy" to "outperform" on November 13, the same day that AmTech Research slashed its price target; and Deutsche Bank cut the stock from "hold" to "sell" on November 10.
Unfortunately, even after this recent flood of negativity from analysts, there's still room for more downgrades and price-target cuts to send Suntech reeling after earnings. Zacks reports eight Strong Buys and one Buy, compared to three Holds and just one Strong Sell.
Meanwhile, Thomson Financial pegs the average 12-month price target at $31.63, a premium of 213% to STP's closing price on Tuesday. Any hint of weakness in the company's third-quarter report or forward-looking guidance could prompt a fresh round of pessimistic notes from the generally upbeat analyst community.
Option players also have low expectations for STP. Yesterday, traders on the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE) bought to open 2,282 put options, compared to just 413 calls. In fact, the shares have racked up a 10-day put/call ratio of 1.55 on the ISE, which suggests that bearish bets have been the investment vehicle of choice among option traders ahead of earnings.
Overall, it's a positive development for STP that pessimism is on the rise among analysts and investors. With plenty of negativity already priced into the stock, potential downside after an earnings miss could be limited. Even better, this bearish sentiment could unwind in the form of buying pressure if the quarterly figures surpass expectations.
However, the shares still have plenty of technical issues to deal with, which means any rally after earnings could be short-lived. STP has been ushered lower by resistance from its 10-day and 20-day moving averages since early September, and fell today to a new all-time low of $9.25. While a post-earnings pop could help the stock climb back atop the critical $10 level, upside from there could be quickly thwarted by resistance on the charts.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
(bloggingstocks.com, Nov 19, 2008)
