SunEdison (SUNE), formerly MEMC Electronic Materials, is one of the largest providers of photovoltaic solutions. With solid growth, innovative products and vertically integrated operations, investors looking to gain exposure to renewable energy generated by the sun can be well rewarded. The push towards renewable energy is not new and the latest commitment by the U.S. President, Barack Obama, highlights the importance and promising future of this industry.
Following a few years with a number of bankruptcies in the U.S. (Evergreen, Solyndra, and SpectraWatt), in Germany (Q-Cells, Solon, Solar Millennium), and China (Suntech and a number of other companies), the remaining players in the solar power business seem better positioned to benefit from higher utilization rates, growth in the industry, and firmer prices. One such company is SunEdison, which has a well-balanced portfolio of projects and businesses and its performance should improve in the second half of 2013 when prices of semiconductors are expected to stabilize and start rising and a number of its projects are due to be completed.
Fundamentals and valuations
SunEdison has 231.8 million shares outstanding for a market capitalization of about $1.8 billion as of this writing and an enterprise value of $4 billion, which includes about $1.6 billion of capital lease obligations or nonrecourse debt. It operates in two segments: semiconductor materials and solar energy. Although the semiconductor materials industry is experiencing decline, SunEdison was able to grow sales from this segment to $230 million in the first quarter of 2013 compared to sales of $216 million in the same period of 2012.
While the solar energy segment of SunEdison experienced declines in sales in the latest quarter ending March 31, 2013, the company has a project pipeline of 2.7 gigawatts and a project backlog of 925 megawatts and a ramp up of this segment is projected for the second half of the current year. The decline in the solar energy business was due to the fact that of the 45 megawatts of solar projects sold in the quarter, 18 were not fully developed engineering, procurement, and construction, or EPC, projects, which carry lower revenue and profit margins. SunEdison expects that in the second half of 2013 and for 2014, EPC projects will decline to a more normal rate of about 5% of all projects.
In addition, the company is focusing on reducing sales volatility by offering more services and growing its distributed generation projects (projects of less than 10 megawatts), which have a short life cycle and often do not even enter the backlog. As of March 31, 2013, SunEdison had 135 megawatts in projects under construction at over 800 projects globally. Below is a table with fundamentals and valuation measures of SunEdison compared to its major competitors First Solar (FSLR) and SunPower (SPWR):
Growth in '13 (est) sales vs. '12
Sales outside of U.S. (2012)
Source: CapitalIQ, Thomson Reuters, author's estimates.
As seen from the above table, SunEdison is among the smallest companies by market capitalization and the company with the most attractive price-to-sales ratio compared to those of First Solar and SunPower. Importantly, SunEdison derives over 70% of its revenues from international sources, highlighting the demand for its products and services around the world and the company's global competitive position.
SunEdison expects to enter even more developing markets as the company is managing its costs well and its products are competitive in developed as well as emerging markets. International markets allow for better utilization and higher sales and other companies are also eyeing international markets. Most recently, First Solar expanded into the Japanese market by acquiring Japan-based TetraSun. SunPower has partnerships with Sharp (OTCPK:SHCAY) and Toshiba (OTCPK:TOSBF) in this energy deprived island nation. All three companies are aggressively targeting the Middle East due to preference for using solar energy (which is plentiful there) and exporting the oil and gas instead of using them as a subsidized source of energy. Also, SunEdison should benefit from the recently imposed tariffs on Chinese solar panels by the European commission.
On the negative side, SunEdison has the lowest current assets to current liability ratio in the group. However, its current ratio of 1.3, which is higher than one, and cash on hand of $421.6 million should provide sufficient liquidity for the foreseeable future.
Some of the recent developments and initiatives involving SunEdison include:
A contract with Chilean-based mining giant CAP to develop the largest photovoltaic power plant in Latin America; the plant will have a capacity of 100 megawatts and meet 15% of the mining company's energy demand.
Created SunEdison Capital subsidiary with the goal to aggregate capital for the development, building and financing of long-term ownership of solar power plants.
Building its services business - the company recently celebrated 1 gigawatt of solar energy under management of its renewable operations center including plants owned by SunEdison and its partners as well as third parties.
First Solar and SunPower also announced significant new developments in the last few months. The most important news came from SunPower, which announced that it has started building a large solar project for Warren Buffett's MidAmerican Solar. The project's capacity is 579 megawatts, which will provide energy to South California Edison, and is already approved by the California Public Utilities Commission. First Solar will engineer, procure, build and maintain the plant, which is expected to be completed by the end of 2015.
Also, SunPower successfully launched the X-Series panels with a world-record efficiency of 21.5% and entered into a partnership with U.S. Bancorp (USB) to provide financing to homeowners interested in installing SunPower systems. Currently, SunPower has 116 deployed megawatts to over 16,000 homeowner customers. Finally, First Solar should benefit from its restructuring program that is expected to produce $15 million of savings in the second half of 2013 and $30 million per year thereafter, helping to keep the company as the most efficient developer of photovoltaic power-plants.
SunEdison has a well diversified business across products and geographies. Following the recent shakeup in the photovoltaic industry and a rough start for SunPower in 2013, the company is well positioned to grow its sales, margins and service offerings. In addition, its semiconductor business has been performing better than the industry in general and any future industry improvements (expected for the second half of 2013 and 2014) will provide a tailwind for SunEdison.
SunEdison is the smallest of the big three photovoltaic providers based in the U.S. in terms of sales. However, the company is well run, it is focused on controlling costs, and has the widest global reach. All this together with an increasing demand for clean and renewable solar energy should benefit investors in SunEdison.