SunPower (SPWRA) trades at 10 times last 12 months earnings and at eight times 2011 projected earnings. The company’s utility and power plant business represented 70.9% of fourth quarter of 2010 revenues compared to 46.8% for the third quarter and 31.2% in the second quarter. The company’s record revenue for the fourth quarter was $937.1 million, which was within the range of expected revenue for the quarter.
The business climate continues to recover and project financing is more available. The company also executed the industry’s first publicly-rated solar project bonds of approximately 195 million euros. The company has much work to do to improve its metrics and earnings quality. Earnings for the third quarter and second quarter of 2010 were significantly improved by transactions that resulted in non-cash gains. The SunRay acquisition and expansion into the project business had a significant impact on operating cash flow.
SunPower fourth quarter of 2010 rankings improved on five metrics and declined on four metrics compared to the third quarter. Operating cash flow-to-net income improved to 18th place from 24th place and free cash flow-to-net income improved to 25th place from 34th place. The company improved on its three year revenue cumulative average growth rate (CAGR) to third place from 19th place due to significant revenue growth in the fourth quarter of 2010 due to project completion and sales. The company also dropped on the cash conversion cycle to 15th from 10th. The debt-to-equity ranking dropped to 21st from 13th primarily due to improving balance sheets of peers. The cash-to-debt ranking is mainly attributed to a number of capital raising events in the past 12 months. Improving its selling, general and administrative (SG&A) expenses will position the company to report better gross margin and net income margin numbers.
The company’s earnings quality was downgraded partially due to the practice of using pro-forma earnings and its income tax disclosure. The company seems to be on the low side of the industry in terms of key performance indicators. With the change in segment disclosure the company has decreased its disclosure of key performance indicators. Governance suffered due to material weaknesses in its internal controls over financial reporting in its Philippines operations that resulted in restatements. The material weakness corrections were completed during the third quarter of 2010. The company continues to report corrections to its financial statements although less material than the prior year’s restatements.
Audit fees have increased 40% from 2007 to 2010; however, the company’s revenue increased 186% and assets increased 104%. Even with the increase in audit fees, the company paid less in audit fees as a percentage of revenue than its competitors on a relative basis. While we are in favor of efficient and effective audits, as a general rule, the auditors will still need to generate a profit and the level of effort will be relative to the level of fees.
During 2010 the company increased its total fees paid to its auditors substantially. Total 2010 fees increased 88% to $5.8 million compared to 2009. Tax fees represented 39.9% of total fees for 2010. The company says tax fees are for tax return preparation assistance and expatriate tax services, general tax planning and international tax consulting. Audit related fees also increased to 12.3% of total fees. Audit related fees are for professional services rendered in connection with consultations with management on various accounting matters. We are concerned that less than 50% of total fees paid to the auditor are for audit fees.
The company has not appointed an auditor for 2011 and did not ask shareholders to ratify the appointment of an auditor at its 2011 Annual Meeting. The company said it is in discussion with its current auditor PricewatherhouseCoopers, L.L.P. regarding the scope of audit procedures and revised fees. We are concerned by the lack of shareholder ratification and ongoing discussions on fees and scope as the first quarter of 2011 came to a close.