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Introduction

SunPower (NASDAQ:SPWR) is the second-largest U.S. solar panel manufacturer after First Solar (NASDAQ:FSLR). The company has a big presence in the downstream part of the solar supply chain, being one of the biggest residential and utility solar panels installers in the U.S.. The company makes the most efficient crystalline solar panel using a proprietary process, which is different from the production process used by the majority of the Asian solar module producers. The company, which went through tough times like the rest of the solar industry has shown a remarkable stock price increase in recent times. This has been due to the general market going up and a couple of huge deals signed by SunPower with Buffett-owned MidAmerican Energy. SunPower was spun off from Cypress Semiconductors in 2008 and a majority stake was bought by French oil giant Total in 2010. The company has benefited from the strength of its parent as it would have been bankrupt without Total support.

SunPower Positives

  1. Total backing - The biggest strength that SunPower has is the backing of its parent Total. Even as other big oil majors such as Shell and BP have retreated from solar energy, Total made a big bet on solar energy by buying a majority stake in SunPower. This eliminates the possibility of SunPower shutting down due to capital issues. A number of big western solar manufacturers like Solyndra and Q-Cells have gone bankrupt as they did not have the money to see through the downturn. Chinese companies like LDK Solar (NYSE:LDK) and Suntech (NYSE:STP) are surviving solely due to the government largesse.
  2. Strong downstream operations - SunPower has a big presence in solar integration, installation as well as third-party financing of solar panel systems. This has helped SunPower to fight cheaper Chinese competitors as it can sell its solar panels to its in-house system installation team.
  3. Utility and Government Strengths - SunPower has a long history of installing large megawatt size solar power plants for both government as well as private players. The company has developed strong relationships with customers and can showcase past experience to win big solar contracts. The recent win in selling the 579 MW solar farm to MidAmerican proves its expertise in this area.
  4. Innovation and Differentiation - SunPower is not only strong in solar panel innovation but has also introduced other solar products like solar trackers, which help in delivering lower LCOE (levelized cost of energy). The new project with MidAmerican will use the new 1 megawatt power blocks made by SunPower. The company has also been using CPV to increase the efficiency of its crystalline solar panels, which are reaching the upper limit of efficiency.
  5. Visibility of Long-Term Revenue - SunPower's utility deals have been the main reason why the stock has gone up from its 52-week low of $3.71 to its 52-week high of ~$10. Investors have liked the fact that almost 33% of its revenue forecast till 2015 is tied up in long-term deals. Even though the Q412 results were below expectations, the long-term visibility gave a big boost to the stock price.
  6. Cost Reduction - SunPower has managed to execute its cost reduction program with panel costs falling faster than ASPs in 2012. The company has eliminated extra jobs and capacity at its manufacturing facility in Philippines. It has partnered with AUO Electronics to reduce the capex requirements.
  7. Solar Trade Wars - SunPower is set to benefit from the solar trade wars that are going on between major trading powers such as the EU, the USA, India and China. With the U.S. already imposing duties on imports of Chinese-made solar panels, Europe is expected to follow soon. This will raise the prices of Chinese solar panels in these markets negating some of the low-cost advantage.

SunPower Negatives

  1. SunPower is becoming too dependent on North America - SunPower is becoming too dependent on the North American market, as Chinese solar panel competitors have captured the other markets. SunPower has almost no presence in China, which is going to be the biggest solar market in 2013 with ~25-30% of the global demand. Even in other parts of Asia, Africa and Latin America SunPower has not been able to win big deals.
  2. Cost Disadvantage - SunPower suffers from a cost disadvantage compared with other c-Si solar panel makers. Though the company has managed to cut costs sharply in the last couple of years by improving polysilicon utilization (4.2 grams/watt now) and improving efficiency, it is still behind its main competitors like Yingli (NYSE:YGE) and Trina Solar (NYSE:TSL) in terms of costs.
  3. Profitability visibility missing - SunPower has been making losses for the last 7 quarters as the industry has been mired in a massive over capacity situation. The company reported a bigger loss than expected in the recent 4Q12 results. The margins from the massive billion dollar deal with MedAmerican have not been disclosed, so we can't judge how the company's profits will look in the future. Solar Installation and EPC business generally has low overall margins (10-20% GM), so while big utility deals can provide a lot of revenue, the big profits are generally missing.
  4. Accounting issue in the past - We don't think it is a big risk now but investors should know that SunPower got embroiled in an accounting issue in the past. The stock saw a big hit at that point of time. However, we don't think the company with Total parentage should have any accounting issues now.
  5. Global overcapacity in solar panels - Despite a number of solar company bankruptcies, the global solar panel market remains heavily oversupplied. The Chinese government is not helping matters by preventing the bankruptcies of nonviable companies. The return to a healthy supply demand balance is taking much longer due to government intervention.
  6. Falling Marketshare - SunPower has lost marketshare as Chinese rivals like Trina Solar , Yingli Energy , Jinko Solar (NYSE:JKS) have gained at the expense of western manufacturers such as First Solar , Solarworld etc. The company now gets most of its revenue from its home market.

Valuation

SunPower has a market capitalization of $1.2 billion, which is much higher compared with that of other Chinese solar companies with higher solar panel sales and market share. While the P/S of 0.5x and P/B of 1x is not expensive on an absolute basis, it is much higher compared with the rest of the solar panel industry. On a comparative basis, SPWR stock is not cheap but on an absolute basis, the stock is cheap and has potential to appreciate. However, for that to happen, the industry will have to return to a normal supply-demand balance.

Summary

SunPower is a complex investing case given the competing positives and negatives. However, the biggest advantage that SunPower has over other U.S. solar companies such as First Solar and Solar City (NASDAQ:SCTY) is the backing by Total. The company might also be a beneficiary of the current trade wars, in which it will mostly be unaffected. SunPower is an innovative company and technology will become one of the most important differentiators in the coming years. We are not sure of First Solar because of its Cd-Te thin film solar technology, which we don't think is competitive anymore. In case of Solar City, we have found it to be overvalued with the segment having low competitive barriers. However, if you are looking into investing in a big U.S. solar company, then SunPower is your best bet. The stock has run up a bit too sharply in recent days. We would look to buy on pullbacks.

Source: SunPower - U.S. Innovation Vs. Chinese Low Costs