Is SunPower Downgrade Warranted?

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 (SRWRF.PK), and SunTech (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 (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.

Comments

[Chad Brown:]

e4capital.com/2009/07/.../

The whole German solar market appears to be suffering the natural consequences of an insantely generous solar subsidy program. When you literally pay people richly to install solar panels and the whole world rushes in to do so, it is destined to end with overcapacity, price-cutting, falling margins, and so on. And the subsidies are scheduled to decline each year by almost 10%

Aug 03 11:18 PM

[Fred W:]

Sunpower has been overpriced for too long.
Overhead is loaded with powerbrokers/lobbyists that now provide little value to the company--the policy "writing" is finally out of their manipulative hands.
SPWR: Get lean, or get ready to lose a lot of money next year.

Aug 04 10:02 AM

[Jack Yetiv:]

I agree with the downgrade, although I am not sure I could call a price target as precise as the analyst. On the other hand, I do not agree with the analyst's implication that FSLR deserves a forward PE (against 2010's EPS, not even 2009's) of 25.

As to SPWRA, the fact that it can put out 22% panels versus just 18-19% by its competitors is not a big advantage. It's worth something, but that something will keep dropping as overall panel efficiencies of SPWRA's competitors reach and exceed 20%, and as panel prices continue to drop.

As to FSLR, its cost advantage is fast eroding as poly-based panels are approacing total production cost of $1/watt and ASP's of $2/watt. Finally, because of a lack of truly meaningful differentiation, the solar business is fast becoming a commodity business, with gross margins of probably 15-20% to be reasonably expected in 2010 from the better-run companies.

Therefore, I do not believe either SPWRA or FSLR deserve forward multiples in excess of 10-15.

This is true despite the fact that I strongly believe PV sales will climb very rapidly from a relatively low base in 2008, as well they should, because many people are beginning to realize that if we take ALL costs into account (yes, including CO2), grid parity has been achieved.

Jack Yetiv

Aug 04 10:10 AM

[Steve Pluvia:]

Chad, the German subsidies are the SOLE reason PV technologies advanced and manufacturing costs declined to a point that some [FSLR] can install commercial size power plants that produce power below that of local with grid power, allowing entire sectors to transfer from imported fossil fuels to domestic produced renewable power [transportation, residential heating, etc].

Understand the effects of subsidies needs more thought than applying simple econ 101 principals.


On Aug 03 11:18 PM Chad Brown wrote:

>
> The whole German solar market appears to be suffering the natural
> consequences of an insantely generous solar subsidy program. When
> you literally pay people richly to install solar panels and the whole
> world rushes in to do so, it is destined to end with overcapacity,
> price-cutting, falling margins, and so on. And the subsidies are
> scheduled to decline each year by almost 10%

Aug 04 11:02 AM

[Zenfar:]

The market doesn't agree with the downgrade. The US solar market is just getting started...

Aug 04 11:32 AM

[searcher:]

Germany is a very special case in that it has comparatively little energy resources for its highly evolved industrial base. Russia and its erstwhile political and economic hegemony are a constant threat to Germany's access to petrochemicals for energy as well as for feedstock. An investment now in alternatives has a much more attractive present value with a future at so unattractive peril.

Aug 04 01:23 PM

[Chad Brown:]

I don't disagree that the German subsidies led to lowering the costs of PV. I would be among the first to thank the Germans for what was in effect a major R&D program for the benefit of all. People should understand what it was and not mistake it for a way for them to make a high return on investment. Investors want to put their money where it earns a return. Philanthropists want to put their money where it will do the most social good. Confusing the two would be a mistake.


On Aug 04 11:02 AM Steve Pluvia wrote:

> Chad, the German subsidies are the SOLE reason PV technologies advanced
> and manufacturing costs declined to a point that some [FSLR] can
> install commercial size power plants that produce power below that
> of local with grid power, allowing entire sectors to transfer from
> imported fossil fuels to domestic produced renewable power [transportation,
> residential heating, etc].
>
> Understand the effects of subsidies needs more thought than applying
> simple econ 101 principals.

Aug 04 02:05 PM

[Steve Pluvia:]

Not all will agree that any PV subsidy program is a mistake. Almost nobody informed on the subject considers the German program a mistake.

To the contrary, Germany installed an aggressive program that provides insulation of their economy from higher oil prices, while substantially stimulating their economy by generating new jobs and developing technology they can export profitably.

Aug 04 03:42 PM

[mkreisel:]

Any "high growth" industry will attract hordes of competitors and mountains of hot money, as was the case with railroad, steel, automobiles, radio, TV, airplanes, airlines, mainframe computers, bowling alleys, manufactured housing, personal computers, semiconductor, .coms, and of course solar PV.

Only few will survive the process.

Aug 05 06:25 PM