Making Sense of the Latest Solar Stock Trades
NEW YORK (TheStreet) -- There was some great news for the solar sector on Thursday and Friday: SunPower (SPWR) and Suntech Power (STP) reported better-than-expected results for the fourth quarter of 2011, and First Solar (FSLR) resolved project permitting issues that had taken shares down last week.
It's important to focus on the improvements that SunPower and Suntech were able to demonstrate, which were significant and relate to both the companies' balance sheets and the improved demand in the fourth quarter. Ultimately, though, it's going to be as important to assess whether the companies provided any incrementally positive view about 2012.
How SunPower Beat
SunPower reported earnings of 16 cents in the fourth quarter, better than the 5-cent loss Wall Street consensus called for. But keep in mind that the consensus was predicated on SunPower booking revenue from its California Valley Solar Ranch project at $100 million in the quarter. The company booked $186 million in revenue from the project -- which is a high-priced power purchase agreement contract, meaning lucrative -- and that swung earnings by 19 cents, according to Stifel analysts.
The large-scale project business is "lumpy," in that it is hard to model when the project revenue will hit the books quarter to quarter. So it's important to look within the "SunPower beats" headline to the trickiness of modeling project revenue and how that creates a big beat.SunPower guided to a loss in the first quarter of 2012 of between 5 cents and 20 cents a share. The company's revenue guidance for 2012 implies that it at least meets the Wall Street consensus, with a range of $2.6 billion to $3 billion. SunPower said it is "committed" to earning money in 2012, but with the only quarter for which it provided specific guidance, it expects to lose money. The situation was improved in the fourth quarter, but SunPower's profitability isn't necessarily improving in 2012. Steve Simko, analyst at Morningstar, also cautioned that while SunPower said it is committed to earning money in 2012 and it guided to a revenue high-end of $3 billion which is above the consensus, the company revised guidance several times in 2011. Better Gross Margins
SunPower reported gross margin of 12.4% in the fourth quarter, and the big part of that was the project business, where margins were above 17%. Residential and commercial gross margin was at 7.5%, which continues a margin trend that has gone straight down from 23% in the first quarter 2011. For the first quarter 2012, SunPower guided blended gross margin lower to a range of 9% to 11%. "While non-GAAP revenue recognition from the CVSR led to a better than expected quarter and 2012/13 North American UPP pipeline looks healthy, the overall solar market conditions continue to be challenging and pricing aggressive, as demonstrated by the pressure on R&C margins that continued to drift lower for the sixth consecutive quarter," Stifel noted. Simko said he estimates that the CVSR project generates gross margins of 21% for SunPower. "That's as good as it gets for them," he said.
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