Is SunPower Downgrade Warranted?

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 |  Includes: FSLR, SPWR, SRWRF, STP
by: Tiernan Ray

Lost market share in the U.S. and a price war in Germany threaten solar panel maker SunPower’s (SPWRA) forecast for this year, writes Pacific Crest analyst Mark Bachman in a note this morning. He downgraded the stock to “Underperform” from “Sector Perform” and set a $21 price target.

SunPower beat estimates for its Q2 when it reported on July 23, and raised the bottom of its forecast for 2009 revenue from $1.3 billion to $1.35 billion this year.

“We have little conviction that goals for the second half of 2009 can be met,” writes Bachman. Some of the main points mentioned in today’s report are a reiteration of concerns Bachman raised right after SunPower’s Q2.

Bachman notes that SunPower’s business is a “black box,” with little disclosure as to what part of sales come from modules, meaning, the components of solar panel systems, and what part comes from systems themselves. He says sales of systems could be delayed by problems with project financing at electric utilities buying those panels. As for modules, the company’s network of 600 dealers leaves little visibility into how module sales may be faring.

Bachman writes that “SunPower does not agree with our assessment of visibility, but dealers who we talk with are adamant that there is significant variability in their project plans, which change daily.” Further, Bachman contends that his own survey of sales leads SunPower is generating from its marketing initiative, www.seizetoday.com, “shows SunPower losing significant market share to Sharp, Germany’s SolarWorld AG (OTCPK:SRWRF), and SunTech (NYSE:STP) in the U.S. market, which puts 25% of SunPower’s revenue at risk.

In Germany, where the company’s modules gained some share in Q2, Bachman is concerned with competitor First Solar’s (NASDAQ:FSLR) disclosure last Thursday that it is using rebates to mitigate the effects in Germany of low-ball pricing from Chinese solar firms. “SunPower claims that its revenue guidance includes up to a 15% decrease in ASP in the second half of 2009,” writes Bachman. “If price competition heats up, this 15% may prove to be too optimistic.”

As for valuation, SunPower doesn’t deserve First Solar’s 25x P/E multiple, he writes, nor does it deserve to trade at a historical low multiple of 9x. So, he thinks a 12x multiple is warranted, which yields $21 target given his $1.79 estimate for 2010.

Shares of SunPower today are up 49 cents, or 1.5%, at $32.69.