SunPower: Solid Medium-Term Outlook Post Earnings

Feb.18.11 | About: SunPower Corporation (SPWR)
In their Thursday conference call SunPower (SPWRA) posted earnings numbers that were significantly above expectations, raised guidance and offered encouraging data points on both the visibility of their project pipeline and their plan to reduce unit costs in the period to 2014.
In terms of the numbers, SunPower posted Q4 revenues of $937.1m, up some 70% from Q3 and 46% from Q4 2009. Likewise non-gaap earnings jumped to $1.36 a share from $0.26 in the previous quarter.
Much of the sequential gap higher in revenues and earnings was due to the execution and monetization of their power plant projects in Italy – producing the lumpy earnings profile. This one-off boost was expected. However, even so both revenues and earnings significantly beat expectations of $931.4m and $1.05 respectively. Obviously a great quarter.
Moreover, the company felt strongly enough to raise guidance for both Q1 2011 and FY 2011 as a whole. Non-gaap EPS for Q1 is now seen in the $0.15 - $0.21 range against previous expectations of $0.16. Meanwhile guidance for FY 2011 as a whole was raised to a range of $2.00 to $2.20 against analyst prior expectations of $1.87. All of this was based on FY 2011 revenue guidance of $2,800 to $2,950 and margins of 20% to 22%.
Clearly, these numbers add significant credence to the stock’s recent rally. Moreover, the analyst call provided a number of answers to questions raised by bears during the recent rally – particularly related to cost-competitiveness and SunPower’s pipeline.
In amongst the detail, I found the following to be strongly supportive:
  1. SunPower confirmed that they see the U.S. market as offering the most opportunity over the next few years - and this is particularly true of the utility-scale PV market.
  2. Building on their significant orders in Italy and growth in the U.S. market in particular, they now have a 5GW AC pipeline globally (defined as projects where they have land positions and are already in control of the site).
  3. Their pipeline for 2011 alone is 1.5GW.
  4. From this point of view, their US utility-scale business capacity is 95% booked out for 2011.
  5. They see margins holding above 20% and likely to improve as more of their own self-development projects kick-in from 2012 and due to cost reductions on a per watt basis.
  6. In terms of costs, the management make the fairly convincing case that although their module prices are higher than those of competitors, when it comes to utility-scale, they compete well on a levelized cost of energy basis - particularly with the costs savings delivered by the OASIS all-in-one modular system, which are on plan to deliver 25% savings.
  7. With further cost savings from their Fab 3 JV in Malaysia, the contribution from OASIS and other factors, they have a roadmap to get to less than $1 / watt by 2014.
  8. Whether or not you buy into that story completely, they do seem to reasonably suggest that costs will fall further in 2011. The table below provides an interesting overview of where these cost savings are coming from.

Click to enlarge
(Click to enlarge)

All of this seems to confirm the solid medium-term outlook for the company which I have been consistently writing about this year. As I have been arguing, company's stock price could easily trade well above $30. Merely taking the new FY 2011 earnings guidance of $2.10 and a PE ratio of 15 would put the stock at $31.50. Consequently, the medium-term outlook remains solid.

From a trading perspective, my views are slightly more nuanced. I am bullish on the company and hold a solid core position.

However, I strongly believe that investors in clean technology particularly have to face the fact that the market often trades on hype and fad followed by exaggerated pessimism and unwarranted weakness. Indeed, until the later part of last year, SunPower was experiencing the later - the very fact that produced the opportunity of which we are now taking advantage.

In view of this, my strategy is generally to look for good clean tech companies trading at beaten down levels. This was the case with SunPower. I then put on both a core position and a heavily overweight trading position with which to ride the recovery from oversold levels.

Once the rally back matures it is always advisable to take profits on the excess trading position and see the rest of the rally out with a solid core position. Such a strategy implies that you will always be taking some profits as the rally continues. However, this strategy also affords much more flexibility and averages well over time.

As I indicated in an article immediately before the earnings numbers themselves, I think we have probably reached that stage with SunPower. At the close just before the earnings announcement, the stock was up 36% year-to-date. It is now higher in the aftermarket. I have therefore now averaging out of my trading position and will be happy to hold my core position for the longer-term. That should ensure that if we see an unwarranted bout of profit-taking I'll have ammunition free to add back to the trading position.

Disclosure: I am long SPWRA.