Eric Landis

Dividend growth investing, long-term horizon, value, growth at reasonable price
Eric Landis
Dividend growth investing, long-term horizon, value, growth at reasonable price
Contributor since: 2013
SCTY just released earnings results for Q4, and the market doesn't like what it sees. Shares are currently down nearly 20% in after hours trading.
Here is a link to the release:
I agree, especially considering LULU hasn't been a momentum stock for about 3 years now since topping back in 2013.
Under Armour
Aubrey McClendon and Chesapeake is another infamous example of a CEO who was forced to sell shares in his company due to margin calls.
Yes, they both have assets behind it, but a bank is lending to someone that generally puts a 10% deposit down and has an amortized mortgage that they make regular monthly payments on. Also, the asset the bank is providing the loan for is generally one that appreciates in value over time as real estate prices typically rise over the years, which lessens the risk should the borrower default on the loan.
SolarCity, on the other hand, is providing solar systems at no up-front cost to the homeowner and will be servicing and maintaining that asset over the length of the contract. The company then relies on the cash flows that the solar asset produces, which depends on its actual power production as well as changing government regulations and possible default by the homeowner. At the end of the 20 years, Solarcity has a depreciated asset that the company will either have to convince the homeowner to sign a new contract on or will have to remove from the house.
Comparing it to banks was a generous comparison. Banks are regulated and required to have a certain amount of capital and have limits on leverage ratios for making loans. SolarCity doesn't, they are simply limited by the amount of debt that investors/institutions are willing to provide them for funding growth. If that debt market dries up, the outlook changes pretty quickly for SolarCity in my opinion.
I think I have a pretty decent understanding of the model, I'm just skeptical that the numbers they are projecting over a 30 year time frame will prove accurate. I think they are being too optimistic about renewals after 20 years with what will then be obsolete equipment and also believe that the ever increasing debt load and lack of cash flow will lead to higher borrowing costs that will require growth to slow.
The company is being valued as a growth stock because there is no earnings or cash flow. If growth slows significantly because financing dries up, the growth story no longer exists.
Obviously the bulls feel differently and think the future cash flows from a growing install base will cover expansion. The next year or so should determine if that is the case.
Here is some information regarding the production facility in New York. I'm hesitant to call vertical integration a positive and it comes with large upfront costs that the company may not see positive return on. According to this, SolarCity is required to spend $5B on the project over the 10 years following completion of the facility, which is a lot of cash for a company with an already high amount of liabilities.
Under the terms of the build-to-suit lease arrangement, the Company is required to achieve specific operational milestones during the initial term of the lease, which include employing a certain number of employees at the facility, within Western New York and within the State of New York within specified time periods following the completion of the facility. The Company is also required to spend or incur approximately $5.0 billion in combined capital, operational expenses and other costs in the State of New York over the 10 years following full production. On an annual basis during the initial lease term, as measured on each anniversary of the commissioning of the facility, if the Company fails to meet its specified investment and job creation obligations, then it would be obligated to pay a $41.2 million “program payment” to the Foundation for each year that it fails to meet these requirements. Furthermore, if the agreement is terminated due to a material breach by the Company, then additional amounts might be payable by the Company.
Due to the Company’s involvement with the construction of the facility, its exposure to any potential cost overruns and its other commitments under the agreement, the Company is deemed to be the owner of the facility and the manufacturing equipment owned by the Foundation for accounting purposes during the construction phase. Accordingly, as of September 30, 2015 and December 31, 2014, the Company had recorded a non-cash build-to-suit lease asset under construction of $238.1 million and $26.5 million, respectively, which is a component of property, plant and equipment – net, and a corresponding build-to-suit lease liability, which is a component of other liabilities and deferred credits, on the condensed consolidated balance sheets.
Thanks for your question, I'm sorry it took me so long to respond, it was a busy weekend. I responded to your other comment further up the thread, hopefully that helps.
I agree that SUNE and SCTY are polarizing companies, and I'd throw TSLA into that mix as well. People have strong feelings on the technologies and the movement toward renewable energy.
Being a conservative investor, I need to see the fundamentals confirmed before buying myself. I think some misinterpret a bearish article as an attack on the industry rather than my intent of simply questioning the economics of the SCTY business model in its current state.
Best wishes,
Thanks, glad to hear you enjoyed it. I agree that the solar sector is very volatile, which is why I am not participating in it. I generally stick to the boring dividend paying companies; if it isn't paying me, I generally won't own it.
I don't see the sector stabilizing until companies can show some consistency of earnings and earnings growth. Unfortunately with the sector being a bit tech and a bit energy, both of which are volatile in their own right, it may be difficult to find ones that can do so.
As for ideas, I don't own any of these myself, and I'm not recommending these as I haven't done due diligence on them, but some to look at could be SPWR, FSLR or possibly TSL. They are companies that have actually produced positive earnings for shareholders.
I don't follow ETF's at all, maybe someone else can chime in on that question.
I found it interesting how many of these companies had just 1 to 2% initial yields at the beginning of the 20 years, and how that compares to current prices where many of them are yielding 2.5% to 4%. It sure seems like dividends will comprise a much larger percentage of future total returns than they have over the last twenty years.
I've said it before, but I think it bears repeating. I have done far better over the years selling off stocks because of declining fundamentals than I have selling great companies simply because they are expensive.
Stop listening to that little devil on your shoulder Mike. Hold on to your blue chips.
Tesla's range is 250+ in Southern climates and good driving conditions. What is the range in northern climates with below zero temperatures?
Thanks for the excellent response and for sharing your story, it sounds like you've done tremendously well for yourself. I hope to be in the same position as you in 47 years and at least half as active by then! Well done sir!
About 55% of my assets are in a Simple IRA, with another roughly 20% in a ROTH, 20% in a Traditional IRA and 15% in an investment club that I participate in with some buddies from college. So while I do have some assets that are affected by taxes, the majority of my holdings are in tax advantaged accounts.
Thanks again for the discussion, I always enjoy the banter.
Thanks for the information and for sharing your thoughts on future funding.
I believe that date is when the one month embargo for Pro Users ends and the article is released to the free part of the Seeking Alpha site. Not sure exactly how that works, I don't have any part in those details. I just submit it and wait for the editors to review and publish it.
Stocktalks is now located under the "My Porfolio" tab.
Excellent write-up, thanks for doing the research for us. Some businesses are easier to predict that others, but I would agree that analysts are generally more optimistic than they should be about future growth.
First of all, my public portfolio is in an IRA, so taxes on capital gains should I choose to sell down the road are not a concern.
Secondly, other than reinvestment of dividends, I don't need high yields right now because I am not using my portfolio for income for another 25+ years. I don't quite see it as a bird in the hand, 2 in the bush scenario in this case, because you don't know if your stock with a high yield now will have that same dividend payout 25 years from now.
I'm not disparaging higher yielding stock as I own plenty of them including O, T, PM, XOM, D, and others. I'm just saying there is more than one way to plan for retirement, and I think there is room for both types in a portfolio.
Now if I was 60 and getting down to the last couple of years before retirement, I would be more inclined to lean in the MRHY direction, but at this point I am taking a more balanced approach.
Thanks for the discussion,
You may be right, I haven't dug into that one at all. Best of luck with your investment.
I realized I made a brain fart on that calculation, it is actually 26% growth over 2015 installations, which would match the guidance you mentioned.
It would make sense that the growth rate will slow as the numbers get bigger. As I said, it will be interesting to see how they fund the growth, the 1GW number is a lot of installations.
The slide I showed in the article was from their investor day presentation held on December 15th, which shows they are planning on originating new solar installations at an annualized rate of >1GW. Looking at page 8 of November call, 1GW would be a 126% increase over the estimated 888MW installed in 2015, which doesn't jive with the guidance you quoted.
Here is a link to the slides if you are interested:
Either management has since lowered guidance since December 15th, or they don't exactly know where growth is headed. Will be an interesting trend to follow.
Thanks for the comments,
Thanks Eli, I appreciate the detailed response.
My intent wasn't to attack SUNE, I was simply showing a chart of the company and how its debt levels ballooned prior to the drop in share price. I felt it was an apt comparison to the current situation with SCTY, my apologies if you took offense to it.
I just submitted edits to the discussion regarding changes to the ITC, hopefully the article will be updated by the editors soon.
I don't claim to be an expert on the Solar industry, I am simply sharing my research done as an individual investor. Do you disagree with the other points I made in the article regarding debt levels, cash flows, and the economics of SolarCity's business model?
Or just hit the "home key" which will take you to the top of the page. Although I suppose that doesn't work on tablets or phones.
mea culpa, I was looking at old data from the SEIA that said it was being reduced at the end of this year, but it isn't correct either that it has been fully extended for 7 years.
Rather than dropping from 30% to 10% at the end of 2016 as I stated in the article, it will now remain at the 30% rate through 2019 and then it will gradually decrease to 26% in 2020, 22% in 2021 and then 10% in 2022. So the 30% rate has been extended by three years and the 10% rate level is delayed by 5 years, from 2017 to 2022.
I will submit a correction this evening to correct that paragraph of the article.
The extension is beneficial to SolarCity, but I would argue that the other problems regarding negative cash flows and funding of future expansion remain.
Thanks for reading, I apologize for the confusion.
It's pretty easy to use, you shouldn't have much trouble. Feel free to PM me if you have any questions though.
I don't have a position in the stock as you will see in the disclosure, I am simply sharing my thoughts on the company's business model.
Do you have any opinion on how they will fund >1 GW of new solar installations in 2016?
Not sure what browser you are using, but I use an add-on called Lightshot for creating my images. It works on both Chrome and Firefox browsers.
Thanks for the link, your site is a tremendous resource. I would note that your site shows 103 companies that have produced a 10%+ CAGR of dividends since 1988.
ABC and AOS do not need to raise their dividends at a 8% or more rate every year for the next 25 years for them to be successful investments.

I'm not so strict with my expectations to think a company will hit a home run every year. I'm perfectly happy with a walk or single every now and then.
Thanks for sharing your thoughts on AMP. I haven't done well with my shares purchased in the fall of 2014 either, but I think the poor performance is more an effect of a shift in market sentiment regarding the financial sector than it necessarily is with how the company is performing.
I'm continuing to be patient and reinvesting the dividends at the now 3%+ yield, but understand you trading out for greener pastures.
Best wishes,
You're welcome, thanks for reading.