Friday, May 07, 2010

Bad year for US solar stock investors.

2010 has not been kind to investors in US solar stocks--and it has been a disaster for Sunpower shareholders!

Frustratingly Sunpower (SPWRA & SPWRB) stock price has performed abysmally so far this year, down almost 50%, with 35% of that hitting in the past 6 weeks alone. All US solar stocks are feeling the heat of the Chinese solar competition which is hurting margins. Sunpower and First Solar (FSLR--which has really been executing on earnings--is basically flat year to date) and even MEMC Electronics (WFR--also flat this year--primarily makes the silicon that solar cells are made of) are in the midst of a multi-year shift in their businesses from all modules (or silicon) to a mix of modules and installation. As the Chinese manufacturers cannibalize panel margins, the thought is that a synergy exists between module making and installing panels that can be captured through integration.

The market is certainly skeptical. Has the skepticism gone too far?

In the case of Sunpower, I believe it has. The company is trading at a 1.4B market cap which is less than 1 times sales (TTM) and a P/E (forward) of ~10. Sunpower has market leading technology and people, and considerable experience with multi-megawatt installations. This is a real company, making real money in markets around the world. At this valuation and market capitalization, it would be a very easy company to acquire. Just as Sunpower was overvalued two years ago at ~$100/sh and the darling of Wall Street, now the pendulum has overshoot on the undervaluation side.

Of course with Sunpower earnings scheduled for May 11, we will soon have more data. While revenues should be strong, expect earnings to be slight--Sunpower guided to $0.07/sh with only a few days left in the quarter. In the meantime they issued $350 million in debt. With full year 2010 estimates around $1.40/sh and full year 2011 estimates at $2/sh, this should be a trading in the low 20s rather than the low teens.

There have been a couple developments in recent weeks including the recent slide in the Euro, and FSLR purchase of a customer (Nextlight) which could negatively impact results this year and next. It is possible management will bring down guidance next week, although they certainly declined to do so when they reported Q4 numbers (late) in mid-March. Module pricing appears to be flat/declining at a manageable rate...Germany is continuing to absorb vast quantities of solar panels, so I don't expect a major downward revision. Although the 20% slide in recent days may mean somebody knows more than I do...I expect it is primarily a consequence of the ongoing market turbulence.

I've also seen reports that Sunpower is losing market share of smaller projects in CA (an important market in the US) to lower priced Chinese manufacturers, but Sunpower also seems to have a substantial backlog of utility scale projects (even if it loses 100-200MW of pipeline as a result of the FSLR acquisition of NextLight).

There have also been good developments including an increase in the amount of solar being installed around the country and a PG&E 50MW order increase (from 200MW to 250MW) and the Flextronics relationship in California.

Finally and perhaps most importantly there has been a constant negative drumbeat from wall street analysts and pundits over the past 9-12 months, that has the potential to turn positive if SPWR starts to deliver on its earnings promises.

The sharp 35% plunge in the past month or so means that the lowest price targets of even the most bearish analysts have been met. Another way to look at things is that Sunpower's rate of decline is unsustainable (it just can't continue falling $2.50-$3/week!), which should lead to at least a short term bounce.

I'm sure others around the world have been watching the oil spill in the Gulf of Mexico. It is clear that we need to maintain, or even increase, incentives for renewables like solar to compensate for the great health and environmental risks of fossil fuels.

As soon as investors (and analysts) have a little time to think about things--focus on the longer term, I'm confident that Sunpower will regain its lustre.


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