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The fourth-quarter 2013 earnings season is coming and SunPower (NASDAQ:SPWR) will be the early bird among its solar photovoltaic (PV) peers to release the fourth-quarter and year-end 2013 financial results on February 12. The results should not be disappointing thanks to the overall revival of the PV market that has been trending upward since mid-2013. The fundamentals of the PV market and manufacturers' operation are in favor of investors. Recently, a lot of research institutes and analysts have been optimistic that the PV industry is heading into its "second gold rush" and the PV installation will reach 49GW in 2014, an over 30% increase from 2013. By examining SunPower's downstream business, this article will present the fundamentals that support SunPower's sustainability in aspects of utility power plant projects and distributed generation business.

Utility projects

By the end of Q3 2013, SunPower possessed 2GW of utility projects built or under contracts and a project pipeline of more than 6GW. SunPower reports an aggregate of over $2 billion of remaining revenue to be recognized on significant utility projects listed on its latest form 10-Q, as seen below.

Project

Location

Size (MW)

Third Party Owner /Purchaser

Power Purchase Agreement(s)

Expected Completion of Revenue Recognition

Solar Star Projects1

California

579

MidAmerican Energy

Southern California Edison

2016

California Valley Solar Ranch (CVSR)

California

250

NRG Solar

PG&E

2014

Project Salvador

Chile

68

Total S.A., Etrion Corporation, Solventus Energias Renovables

N/A

2015

1 Previously known as Antelope Valley Solar Projects (AVSP)

The first 57MW of Solar Star Projects was completed and on grid early this month, and CVSR was put into full commercial operation, bringing the total electric generating capacity up to 250MW in Q4 2013. SunPower started construction of Project Salvador last month and the plant is expected to commence partial commercial operations in Q4 2014 and full commissioning in early 2015. SunPower has another two significant construction and development projects, i.e., Quinto and Henrietta, with executed power purchase agreements, but were not sold or under contract yet as of September 29, 2013. Quinto and Henrietta are both located in California with a size of 110MW and 100MW, respectively and with an expected completion of revenue recognition by 2016. Not only has SunPower's utility power plant business been quite successful in the US, but it is extending its footprint in emerging markets such as Japan, Africa and South America as Total's backup.

Developing utility-scale PV power plant projects was First Solar's (NASDAQ:FSLR) exclusive business model years ago. Now more and more PV manufacturers are pursuing downstream business, of which utility projects are considered as high margin contributors, compared to pure solar module sales. In terms of utility project pipelines, a key indicator of business outlook, SunPower is catching up to First Solar and leading Canadian Solar (NASDAQ:CSIQ) by 3GW. The pipeline numbers as shown in the table below are my estimation based on each company's materials as of Q3 2013. Here, projects are categorized as late-stage that either contribute revenue or stay in revenue backlog, and early-stage that do not have an impact on revenue yet.

Late-stage (GW)

Early-stage (GW)

Total (GW)

First Solar

1.3

6.4

7.7

SunPower

1.2

6

7.2

Canadian Solar

0.8

3.5

4.3

Distributed generation

Distributed generation (DG) business of SunPower creates revenue from (1) module and balance of system (BOS) components that sell to over 1,800 dealers, system integrators and distributors worldwide; (2) residential lease programs that collect cash payment from leasees.

DG is estimated to account for more than 60% of SunPower's shipment in MW, and less than 50% of the whole revenue. International DG business takes a big portion of SunPower's portfolio. Following its long partnership with Toshiba, SunPower continues to expand its presence in the lucrative Japanese PV market by supplying 69MW to Shimizu and 20MW to Ecomax recently. The residential lease business has a low profile for SunPower and it only accounted for 5% of the total revenue of the first nine months in 2013, though SunPower sees accelerating growth and aims for deploying around 400MW by 2015, up from the current 140MW.

2013 earnings and 2014 outlook

SunPower's GAAP financial data up to Q3 2013 is re-organized as below.

FY'12

Q1'13

Q2'13

Q3'13

Q4'13(NYSE:E)

FY'13(E)

Revenue ($ M)

2,418.0

635.4

576.5

657.1

575 - 625

2,450 - 2,500

Gross Margin (%)

10.2

9.3

18.7

29.4

17 - 19

18 - 19

Earnings Per Share ($)

(3.01)

(0.46)

0.15

0.73

(0.10) - 0.10

0.45 - 0.65

MW Recognized

863

173

277

252

300 - 330

1,000 - 1,030

In line with the PV industry recovery from the imbalance of demand and supply, SunPower has been improving operating performance. SunPower's earnings per share (EPS) of Q2 returned to positive, so will the EPS of 2013. 2013 was a strong year for SunPower and the momentum will go on into 2014, as quoted in the Q3 earnings call.

For 2014, we will lay the groundwork that will allow us to rapidly expand our infrastructure and manufacturing scale in 2015, while delivering strong bottom line performance next year. For 2014, we see non-GAAP earnings per share per quarter in the range of $0.15 to $0.35, with full year earnings of at least $1 per share.

SunPower could keep improving performance throughout 2014. As the revenue related to utility projects is recognized using the percentage-of-completion method, the quarter-over-quarter financial results may be a little volatile due to the timing of revenue recognition, but the whole year of 2014 will be solid without a doubt.

The main challenge for SunPower is its unsynchronized cell capacity expansion with the PV market growth. SunPower has a total of 1.2GW cell capacity in its Fab2 and Fab3 facilities up to date. In 2014, only a 10% increase to around 1.3GW is possible by throughput improvement. Fab4, an additional 350MW cell capacity, is brought up to schedule that implements the first silicon in early 2015 and the full ramp-up by the end of 2015. SunPower may lose some market shares in 2014 and even 2015 when the PV market is in double-digit growth.

Summary

SunPower's business fundamentals are healthy in relation to the strong demand of PV market. Internationally diversified utility projects provide good visibility of the years ahead, in addition to the leading high efficiency products that exclusively fit to DG application. SunPower will obtain stable positive earnings across the following quarters and the cell capacity constraint is the foremost bottleneck restricting SunPower's upside.

Source: SunPower Has A Robust Fundamental Outlook