- Factors contributing to RGSE's decline are analyzed.
- There is not enough public information to judge a recent acquisition.
- Positive EBITDA was not achieved in Q4, possibly due to weather.
- However, tremendous solar growth is expected in 2014.
The solar sector has been battered recently. Many top names are down over 10% in the past month, including SolarCity (SCTY down 27%) and SunPower (SPWR down 13%). A smaller solar financer and installer, RGS Energy (NASDAQ:RGSE) is taking its fair share of punishment, as it is down 10% in the last month. There are multiple reasons why the stock is down, but its recent acquisition of a Hawaiian solar installer is the most significant.
RGSE has announced plans to acquire the Kailua-based solar installer Sunetric. (Kailua is located on the Oahu island of Hawaii, close to Honolulu.) The official announcement states:
"The acquisition provides RGS Energy with rapid entry into a major market that has the highest electricity rates in the U.S."
At issue is the slowdown of solar installations on Oahu island. The upper limit on solar installations has been capped at 120% of minimum daytime load, and there is so much PV capacity that the limit is causing slowdowns in the approval process. In fact, solar permit approvals on Oahu have fallen to the lowest level in two years.
Without more information, we don't know how the permit slowdown will affect Sunetric, but it seems like bad news. If some of Sunetric's 90+ employees are idled, that's a large payroll burden that RGS Energy has taken upon itself. Assuming the average Sunetric employee makes $40,000 annually, the payroll burden on RGSE is $3.6mm. That would be a heavy load for a company that struggles to be profitable, and whose Q4 revenue was $30mm.
We hope and expect that RGSE carefully analyzed the situation and had some strategic motivation behind the acquisition; maybe the $16mm price was an extreme bargain and Sunetric is highly profitable. But without more information on Sunetric's situation, it's hard for us (the public) to analyze the acquisition. Another black mark against RGSE is that it missed its forecast of positive EBITDA in Q4, with the miss being blamed on harsh weather. (Q4 results here)
Fortunately, it looks like the sector has found a bottom and is bouncing back on April 4th. There are many reasons to be optimistic about the solar industry, so don't be fooled by this recent weakness. 2014 PV installations are expected to total 49-50 Gigawatts, which represents 26-28% growth over 2013 and beats most forecasts. RGSE has been growing strongly, becoming the country's 5th-largest residential solar installer in Q3 2013 according to GTM Research. There are reasons to believe that RGSE will grow out of its current woes and uncertainty, as revenues are trending up and losses have narrowed.
As to my own portfolio -- I've owned RGSE stock in the past, and I'm tempted to jump in again. However, I'll wait for the situation in Hawaii to be resolved. At the moment, SunPower is my best pick in the sector. It's a very high-quality company with strong management and strong profit margins, but its share price has been stagnant for the last six months. Trina Solar (NYSE:TSL) is also worth investigating because of a brand new high-efficiency module.