There is clearly something positive going on at Sunworks (SUNW), the Californian solar power systems business and panel installer:
In the space of a month, the shares almost five-folded, although they recently have given back some of these gains and now they've 'just' three-folded. Life can be tough.
At first sight, it might be hard to spot a trend change in the results:
In fact, there is no trend change in the performance, but clearly, investors expect a pretty dramatic improvement and we think they are right.
We see multiple reasons for improvements, most notably:
- A resumption of revenue growth
- Increasing gross margins
- Decreasing operating cost
- Reduced delisting risk
The company has three businesses:
- Public works: 18% of revenue (down from 25% a year ago).
- ACI (agricultural, commercial and industrial): 52% of revenue (up from 46% a year ago).
- Residential: 30% of revenue (unchanged).
The residential market has been stagnating for some time but the results in Q4 were quite encouraging, implying a 20%+ growth on an annualized basis.
There could very well be more to come next year, as a building mandate in California requiring new houses to have solar panels installed will become effective. Management sees a $5M incremental revenue (200 homes at roughly $25-$30K per home) in just the partnership with these three, but the opportunity could be much larger.
In preparation for that, the company is in advanced stages to forge partnerships with three builders, although these are smaller ones as they are likely to treat Sunworks more as a partner, rather than a commodity.
The company is also increasing its geographical footprint with new businesses on other states, like contract wins in New Jersey, Massachusetts and Hawaii, as well as partnerships with a national grocery store chain and automobile dealership.
From the 10-K:
While 2018 still showed a considerable loss, the company actually managed to reach break-even in Q4.
From the Q4CC:
we anticipate a slow start to the year in terms of revenue due to the rainy weather in California. After this slow first quarter, we anticipate returning to profitability in Q2 and for the remaining quarters of the year.
Q4 gross margin at 18.6% was the highest in six quarters but there is considerable room for further improvement as margins are still held down by previous projects when pricing and cost estimates were pretty weak, leading to projects that turned out to have below par margins.
Starting last year, management intervened and projects since enjoy considerably higher margins, and as these older projects decline in importance, overall gross margin will increase further. The drag from this is already falling quite steeply, from $6M in Q3 to $3M in Q4.
Another reason to expect gross margin to climb is the resumed growth in the residential segment, which suffered from stagnation and hence fixed cost weighted more heavily.
Management seems to expect margins to trend towards 20%+ in the second half of the year.
Operating expenses have declined 9 quarters in a row and are now $3.1M, down from $3.9M a year ago, a 21% decline.
Stock-based compensation declined to just $130K from $326K a year ago. Interest expense remains at $191K for the quarter and will remain at these levels.
The company built excess inventory ahead of tariffs and these balances have been steadily reduced since topping at $6.6M at the end of Q1 last year to $3.2M now, and management expects the declines to continue.
The company sold a $3.75M promissory note in April, which is the bulk of the debt. The company has $4.9M in debt and $3.6M in cash and equivalents, down considerably from the $6.4M at the end of 2017.
The CEO is also voting with his wallet. Normally, we see a sea of red here (from FinViz):
With the stock price well above $1 and revenue and margins improving, the risk of delisting from the Nasdaq is waning. The company got an approval for half a year extension, which would give them until September 16 for these improvements to solidify their position, which looks well within the realm of the possible, if not likely.
We're still at the low end of historical valuation metrics, at least on a sales basis. Analyst EPS estimates are just based on a single analyst, but at least they are (marginally) positive, reaching $0.01 this year and $0.09 the next.
The solar market is healthy, and the company's fortunes are turning for the better, with good expansion opportunities and improving margins. The shares have already absorbed much of this improvement, in our view.
Basically, the company is still losing cash (which could become a problem) and only just reaching break-even in the last quarter. However, with growth returning to residential and the former below par margin projects running off, the prospect is for these metrics to show considerable improvement during the year.
We think the shares will remain fairly volatile, but we also think they offer interesting prospects on a sell-off, like the one we are experiencing at the moment. But given its history of volatility, it's certainly not without risk.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.