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Solar Stocks Cheer SunPower Results
A Taipan Publishing Group Investment Research Report
By Zachary Scheidt, Editor, Taipan's New Growth Investor
Solar stocks were up in unison Friday, July 24th after an earnings announcement from SunPower Corporation (SPWRA:NASDAQ). The company not only beat estimates for its second quarter, but also gave encouraging guidance for the rest of the year. Revenue came in at $298 million which is up roughly 40% from the first quarter, but still well below the level seen last year when solar stocks were in vogue. Analysts had been expecting revenue of $263 million so the report was certainly a positive surprise
Earnings were also much higher than expected, coming in at $0.24 per share versus the $0.14 expectation. Part of the strength was due to the mix of business as the company saw a 76% increase in module sales (as opposed to full solar systems). During the quarter, SPWRA was able to significantly reduce its inventory levels which had been a major concern for investors.
The inventory days (number of days it would take to sell all current inventory) was cut nearly in half which puts SunPower in a much more flexible financial state. It is expensive to be carrying so much product, and usually results in lower pricing power which has plagued the industry in recent quarters.
While many solar investors concentrate on companies serving China, SunPower operates primarily in the United States and is much more active in the rooftop segment as opposed to more extensive ground based installations. At this point, SPWRA appears to be in the sweet spot as the larger installations are still taking time to plan and build.
However, funding appears to be in place to provide incentives for rooftop installations which have been picking up in sunny parts of the US. If this particular portion of solar energy continues to shine (pardon the pun) we could not only see more units sold, but more importantly, the sharp slide in pricing could be muted which would lead to better profitability.
Forecast for 2009 and 2010
According to Thomson Reuters, the average analyst forecast for earnings in 2009 and 2010 are set at $0.95 per share, and then $1.74 next year. While these numbers are relatively impressive (given the difficult market and continued concern over excessive industry inventory), some analysts are beginning to raise their expectations. Ramesh Misra at Brigantine Advisors recently upped his 2009 estimate to $1.25 and expects 2010 earnings of $2.42.
If this estimate is close to being correct, and the market places a relatively reasonable multiple of 20 on this dynamic growth stock, investors could quickly see the stock close to $50. While that price is a far cry from the euphoric $150 we saw at the height of what can only be described as a solar bubble, a price of $50 would still represent a 60% gain from current levels.
Looking at the financial strength of the company, it appears that SunPower has its act together. During the second quarter, the company was able to raise $450 million by selling equity and convertible debt. This is an excellent demonstration of the liquidity and capital which is once again available to functioning and profitable solar companies. While the convertible debt will certainly carry its price tag of interest expense, the flexibility which allows SPWRA to invest in its business and maintain healthy capital ratios will pay off for shareholders.
Within the industry, many solar stocks have responded positively to the news - First Solar (FSLR:NASDAQ), LDK Solar (LDK:NYSE) and Yingli Green Energy (YGE:NYSE) are showing unrealized gains of 36%, 75% and 123% respectively. While all three of these names have yet to report second quarter earnings, the positive news out of SunPower has the entire sector trading higher as investors expect similar results from competitors. A word of caution is in order because there could certainly be differences in how each individual company is operating. Political, geographical, and operational differences will cause each stock to behave a bit differently so investors would do well to avoid lumping them all together in the same broad category.
Still, the picture for solar producers is getting clearer and as the industry works through excess capacity and demand begins to pick back up there could be opportunities for significant further gains.
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