SunPower Earnings Preview: Contending With Shifting Demand

| About: SunPower Corporation (SPWR)

SunPower (NASDAQ:SPWRA) has scheduled its Q2 earnings release for next Tuesday. We expect that solar module manufacturers will report a difficult quarter as the industry has had to contend with subsidy cuts in Italy – the world’s second largest market for solar. A reduction in demand has resulted in an oversupply of modules that has led to a 20% reduction in prices. [1] SunPower competes with other players in the solar module industry such as First Solar (NASDAQ:FSLR), SunTech Power (NYSE:STP) and LDK Solar (NYSE:LDK).

We believe that lower gross profits because of changes in the revenue mix of the company with higher demand for its Residential and Commercial Components (R&C) and the ability of the company to monetize synergies with Total S.A. will significantly impact the upside and downside potential for our $21.90 price estimate of the stock, which is at a near 20% premium over its current stock price.

Demand shifting to R&C may hurt margins

To counter lower demand for Utility and Power Plant (UPP) components, SunPower reallocated 85 MW of capacity to its R&C division. While the company hopes that strong demand from the Italian rooftop market will help it offset the decline in revenues because of subsidy cuts, it acknowledges that margins in the R&C market are lower than those in UPP. [2] We estimate that the adjusted EBITDA margins for SunPower in the R&C and UPP division for the year 2010 are 24.6% and 27.3% respectively.

(Chart created by using Trefis' app)

SunPower expects that its industry leading efficiency in the rooftop market make it the preferred supplier for the segment as its technology helps earn the highest rooftop returns for its customers. [2] In the U.S., SunPower announced that it would launch a $105 million fund to finance lease projects for residential customers interested its high efficiency systems. [3] With all these efforts to boost sales in the R&C market, SunPower expects that the division will contribute 55-60% of its total sales in 2011. [2]

How will alignment with Total affect SunPower?

Total S.A. purchased a 60% stake in SunPower in June as a strategic long term investor. The deal granted SunPower access to a $1 billion in credit support that would help the company accelerate on its long term growth plan. More importantly the deal allows SunPower to expand its R&D efforts through joint collaboration with Total. SunPower depends on its industry leading technology to command a price premium on its solar modules.

Total’s operations span over 130 countries which will help SunPower expand its target market. Presently, sales outside the U.S. and Europe contribute to only 13% of the company’s 2011 sales outlook. [2] Expansion in other markets can help the company grow its overall sales.


  1. After dismal second-quarter, solar outlook brightens, Reuters
  2. 2011 Outlook Supplementary Slides, SunPower
  3. SunPower and Citi Team to Finance $105 Million in Residential Solar Lease Projects, SunPower

Disclosure: No positions