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Real Goods Solar: Turnaround Underway And Possible Huge Rally After Earnings?

|Includes: RGS Energy, Inc. (RGSE), RUN, SUNW, VSLR

There are two parts of contents in this article:

  • First, I'll discuss why I think RGSE's turnaround strategies are likely to work in the long run.
  • Second, no matter its turnaround strategies work or not in the long run, RGSE shares will probably have a huge rally after tomorrow's earning conference call.

Let me start with the first thesis: RGSE's long-term outlook. I don't want to use lots of time on writing articles, so I'll just give my key points and key supports.

As many SA authors have mentioned, solar industry will go on developing. The reasoning is simple: The solar industry employs 208,000 people, according to a recent EDF report----the number had been doubled since 2010----which is too big a number to be ignored by the government.

Yet solar industry is undergoing structural change. First, three basic facts about this industry:

  • A. Equipment costs have been significantly lowered, especially solar panel, and will go further lower in the future.
  • B. Rooftop installation, technically, is very easy and has no moat.
  • C. With installations getting older, here will be more and more maintenance service need in the future.

Fact A leads to:

  1. More and more homeowners will prefer to own their solar panels and the mainstream leasing business mode will gradually disappear. Thus the advantage of VC backed installers with easier approach to financial market will disappear.
  2. Customer acquisition cost has become a bigger part in the total cost structure. According to SunRun's recent quarterly report, its acquisition cost was as high as $0.9 per Watt. So low customer acquisition cost will become a key point for competitive advantage.

Put 1 and 2 together with Fact B and Fact C, we can safely draw conclusion that solar installation industry will be more and more scattered, and small local installers close to communities will have competitive advantage compared with bigger players, because they get business from referral, thus has zero acquisition cost, and they can respond very quickly to maintenance need.

From above understandings on this industry, we draw the conclusion that the strategies in RGSE's slides (https://seekingalpha.com/article/4021317-rgs-energy-inc-2016-q3-results-earnings-call-slides) are the right ones and will probably work.

Besides, I read the company's earning conference call transcripts since 2014, and I think the company has been prepared for a gorgeous turnaround. It has effectively slashed costs, retreated from non-profitable areas, adjusted its strategies, etc, and since 2016, it has expanded its territory in carefully selected states.

On the contrary, the business mode of SunRun and Vivint Solar are subject to change in the future, and the bold, extensive expansion of Sunworks will probably lead to bankruptcy.

Of course, I don't mean to encourage readers to make long-term investment on RGSE. Personally, I don't think to hold long-term long position of a company in a highly competitive, low moat industry is a good idea.

Then there comes the second part of this article: Why I think there'll be a big rally in RGSE's stock price after tomorrow's rally. And again, I'll just give my key points.

First, as I have stated above, the company has been well prepared for a turnaround. The company did three secondary offerings since Dec.8, none of which were toxic. The only way those institutional investors participating in the offerings could make money was through share price going up. So if the CEO didn't cheat those investors to buy shares, he must have managed to prove to them that there were good reasons to support the share price to go up.

The details of the three offerings can well explain the recent stock price performance.

During the first offering on Dec.8 2016, the company issued roughly over 600,000 shares at $6 per share and the same number of warrants to buy shares.

  • The exercise price of those warrants was set to be the lower one between: $10.5, and the lowest close price in March, which well explained why the stock price has been declined all the way to before earnings----investors wanted it to keep it as low as possible, thus to have a favorable exercise price.
  • Besides, from the information I found from RGSE's SC-13G SEC filings during this period, I think investors who took part in this offering had been sold out their shares before February and then at least some of them also took part in the following offerings on February 2017, among which there was CVI Investments, who was also behind the recent RGSE rally since Jan. 5. (So I think we can safely assume that RGSE has been keeping very good communication with its investors. )
  • After this offering, the overall share count was about 1.3mn.

The second and third offering was on Feb. 1 and Feb. 6 2017, with totally 6.1mn shares and pre-paid warrants offered and offering price respectively at $3.1 per share and $2.5 per share. Apart from the shares issued, there are also:

  • 3.71mn warrants with exercise price at $3.1 and 1.8mn warrants with exercise price at $2.4 issued.
  • Warrants issued to underwrite Roth, with exercise price at the 125% of those warrants issued to investors. There are 0.185mn warrants with exercise price of $3.875 and 0.08mn warrants with exercise price of $3.125.

Now after the three offerings, RGSE has about 18mn cash in hand, no debt. And its share count grows to about 7.4mn, in which 6.1mn, that is 82.4%, were from the institutional investors during the last two offerings. And there are those warrants issued during the three offerings overhang.

Only when share price goes higher than exercise price, will investors exercise their warrants. The company want money, and investors want to make profits, so they both need shares to go up. All they need is a catalyst. RGSE has released preliminary Q4 figures, so there won't be any negative surprise on the earning conference call. But if there is some update on recent business, for example, if backlog has increased during the first two months of 2017, share price will get a boost.

RGS Energy will present at Roth Conference on March 15, and I think there's good reason to believe it has some progress and it won't just repeat the slides given on Nov. 8 2016.

Of course, it is just a speculation that RGSE has made enough progress in its business that could give share price a boost. But at current share price and share count, RGSE's market cap is 10mn, just 61% of its cash in hands, I think the downward risk is relatively small, but the upward potential is huge. So it will be a good candidate for a speculative short-term investment.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RGSE over the next 72 hours.