Sell-Side Reaction to Sunpower Corporation's 4Q05 Earnings: David Edwards, Am Tech Research (SPWR, ESLR, STP)

Includes: ESLRQ, SPWR, STP

American Technology Research analyst Dave Edwards sent a note to clients following solar energy company Sunpower’s (NASDAQ:SPWR) 4Q05 results. Key extracts:

We are upgrading SunPower from Hold to Buy following the company's earnings call yesterday. We are encouraged by the company's solid results in Q4 but, more importantly, we are encouraged by management's forward-looking guidance in terms of manufacturing ramp and available silicon supply. SunPower's technology leadership and rapid growth path positions it as one of the leading companies in a very strong growth market... We believe that SPWR should be a core holding in an energy technology portfolio.

We initiated coverage of SPWR with a Hold because we believed that the future upside was already priced into the stock. Our view has fundamentally changed for three reasons:

• Manufacturing ramp. The company's manufacturing ramp has increased significantly. Based on management's guidance, we have increased our production expectations significantly.

• Gross margin. SPWR's gross margin beat our estimate in Q4 and the company guided to a higher gross margin in Q1 than we had been forecasting. In addition, management stated that it plans to decrease the silicon grams/Watt from 8-9 g/W today to 6-7 g/W over the "next few years". This could drive significant cost savings.

• Silicon supply. Perhaps the biggest announcement on the call was management's discussion of what it sees in the silicon supply market. The company stated that it expects that 6,000 MT of additional supply will be added to the market in 2006 and 8,000 MT will be added in 2007. This is much more than we have seen in a variety of industry reports. We are inclined to believe SunPower's numbers since it is in the market of buying silicon and probably has a better understanding of new capacity.

We are assuming significant multiple contraction from today's 82x forward multiple and are establishing a 12-month price target of $45 which is 35x our 2008 EPS estimate and 4x our 2008 sales estimate. Clearly, a multiple of that magnitude carries inherent risk but we believe that the stock can trade in that range in 12 months based in the company's rapid EPS growth - 111% in 2007 and 44% in 2008.

[Valuation chart with comparable solar companies
Evergreen (ESLR) and Suntech (NYSE:

SPWR 1-yr chart:

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