In a series of articles over the period since mid-December, I have argued a bullish case both for US solar in general and for SunPower (SPWRA) in particular. SunPower, alongside First Solar (FSLR), is likely to be one of the main beneficiaries of the exceptional growth likely to be seen in the US utility-scale solar market in the period ahead.
SunPower itself is now up 29.3% in the six weeks since the end of last year and meanwhile now faces its earnings release this week. According to First Call’s survey of 29 brokers, the market is looking for EPS of $1.05. I have no specific insight myself into the numbers. However, an assessment of risk-reward perhaps suggests that it wouldn't do any harm to book some profits.
The rally has been driven mainly by the forward-looking story over the coming year. Meanwhile, the earnings numbers are historical and unlikely yet to reflect much of the coming strong performance – particularly in relation to utility-scale solar. Consequently, I have taken some profits for my own portfolio and will buy back what I have sold if there is any downside in the aftermath of the earnings announcement.
This is largely a short-term tactical view. However, it is worth briefly reviewing the situation currently facing the stock. Firstly, the medium-term bullish story –
- The roll-over of the 1016 Treasury Grant program for renewables at the end of last year (more details here).
- Renewable Energy Standards for specific States, many of which have specific carve-outs for Solar.
- The possibility of an agreement this year on a Clean Energy Standard at the Federal level. The prospects here have been enhanced by President Obama’s State of the Union Address (more details here).
- SunPower itself , as the number two player in US utility-scale solar, is well-positioned to benefit from the above developments (more details here).
- In January, Sunpower struck a very lucrative and very significant deal with SoCal Edison to deliver 711 MW of generation capacity between 2014 and 2016 (more details here).
All of this suggests a very bullish outlook for SunPower over the rest of the year. When I discussed SunPower’s valuation ratios back in January, the company’s PE ratio was around 7.2 on 2011 earnings. According to First Call, the recent rally in the stock now puts that number at 8.6. In the medium-term, as the above bullish story plays out we could see SunPower’s share price around $28 with a PE ratio of 15 on 2011 earnings.
However, the focus of my attention is that all of this is currently a forward-looking story – which will increasingly affect revenues and earnings as further utility-scale orders fall into place. Meanwhile, with the stock up 29% since the beginning of the year we have priced in quite a lot. And importantly, this week’s Q4 2010 earnings numbers themselves are unlikely to add to that story.
An assessment of the risk-reward perhaps therefore suggests that the risk is skewed towards temporary disappointment. At current prices, I’m therefore inclined to book some profits on a portion of my position with a view to buying back on any short-term earnings-related weakness.
Further out, the US utility-scale story is impressive and SunPower is likely to be a strong performer.