- Sunpower delivered strong earnings results for Q1 2014.
- SunPower is benefiting from rapid growth in solar deployment.
- SunPower product cost structure could be its Achilles heel.
From the results, it is clear that SPWR is benefiting from the boom in the solar industry. The business is improving, the ASPs are stabilizing and the margins are improving.
Here are the things that we like about SPWR:
- Business is improving. SPWR increased sales and profit guidance for 2014
- Earnings guidance is at $1.10 to $1.40 for CY 2014
- Factories ran at full utilization
- SPWR expects 50% growth in EPS in 2015
- The project pipeline is growing. Total SA (EN Paris:FP) (NYSE:TOT) relationship is giving SPWR a major strategic advantage worldwide
- More and more of SPWR business is being migrated from modules to packages
- Module ASPs were strong in Q1 and are expected to be stable for rest of the year (we already forecasted this in our earlier article)
- SPWR has sufficient lease financing to last for 6-9 months and is set to grow residential/DG deployments by 50% this year. While getting financing for solar projects is very easy nowadays, it is good to know that financing is not a bottleneck for SPWR.
- SPWR's average residential system size in the quarter was 8.3kW, which indicates SPWR is getting business from premium large residential customers. The customers are likely affluent and the default rates on these installations are likely to be much better than that of SolarCity (NASDAQ:SCTY).
Here is what we do not like about SPWR:
- We believe that SPWR efficiency advantage will reduce considerably in 2014 and even more dramatically in 2015.
- Revenue growth is below its residential/DG industry peers. Year-over-year, SPWR grew from $575M to $684M. This is a healthy 19% growth. But its competition, SCTY and SunEdison (NYSE:SUNE) are growing much more rapidly. We believe SPWR is severely disadvantaged by its high cost panel technology.
- SPWR does not provide visibility into manufacturing costs. This we believe is because SPWR technology is not cost competitive. We estimate SPWR panel costs to be around $0.90 per watt compared to industry leaders who are closer to the $0.50 per watt level. While SPWR technology does produce higher efficiency panels than its competitors, this cost gap is untenable. SPWR's high cost per watt makes the company susceptible to industry downturns.
- The 22% GM is rather low, considering the fabs are fully utilized and the premium it collects on its projects. This GM is also a testament to the cost disadvantaged panel technology that SPWR uses.
- We do not like the higher energy rates ($0.182 energy rate) and the escalator (albeit small compared to its competition) that SPWR residential customers are paying. In spite of the affluent customer base that SPWR seems to be attracting, these high rates increase default risk and reduce the residual value the system may have at the termination of the contract. (On the upside, there is little doubt that SPWR is attracting a higher value and potentially lower credit risk customer than its competition).
- SPWR is planning to add new capacity in 2015 and expects a 35% cost reduction at the new fab. That would put the SPWR cost per watt cost close to $0.60 in 2015. This again is too high in our opinion and not competitive. The high performance product does provide differentiation in the short term, but saps margins. Because of its higher cost technology, SPWR may be leaving $0.30+ cents per installed watt at the table.
- In North American residential market 24MW of the 35MW shipped were from cash sales. SPWR management said that cash sales were less profitable than lease sales. SPWR management has also stated that cash sales are better than leases for customers (which is already well known in the industry but not as well known to customers). As customers catch on this reality, we believe cash sales will increase and lease/PPA sales will decrease. Not a good sign from lease/PPA vendors.
Here are some things we are unsure about:
- SPWR has an intriguing concentrator technology. Localizing C7 in China to get cost out seems to be a good strategy. However, we are unsure of the long-term LCOE and viability of the concentrator technology.
- SPWR along with the rest of the industry is racing towards Yiledcos/Holdco model under the belief that they will be able to get lower financing rates through these vehicles and also under the belief that the companies are unable to capture the value of the solar asset they have built through normal project sales. While there is some merit to these arguments, it is also highly likely that SPWR and its peers are overvaluing the value of the assets they are building because of unrealistic long-term pricing and default assumptions
- Yieldco/Holdcos bring considerable amount of uncertainty to the earnings stream and make predicting real profitability a challenge
- We are not sure if SPWR has a roadmap to cost competitive module technology. To gain investor confidence, the company should share its roadmap to being cost competitive with its panel technology. If SPWR does not have a path to cost competitiveness, a better strategy for SPWR would be to divest its panel operation and focus its considerable experience and resources on project development where it is likely to grow much more rapidly and deliver substantial shareholder returns.
- We believe SPWR earnings are going to accelerate substantially in 2014. We expect the company to post CY2014 profits well in excess of the projected $1.10 to $1.40 range.
o On earnings momentum, we see the company a short-term BUY
- We believe that the company's efficiency advantage will reduce dramatically in 2014 and even more in 2015. We are unsure of the company's product cost structure roadmap and believe it could be the company's Achilles heel. However, SPWR could benefit substantially from its relationship with Total SA and do extremely well on the project business.
o On the technology and long-term viability, we see the company as a SPECULATIVE BUY