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SunPower Cost Model Is Key to its Future

SunPower could surprise marginally to the upside with its after-market earnings on Tuesday, but the long-term outlook from the U.S. solar company is the needle mover.

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SunPower

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will report after the close on Tuesday, and even a modest revenue surprise to the upside won't change the opinion of investors and analysts that issues for SunPower are of a more fundamental nature than any one quarter performance.

No one is expecting a big quarter from SunPower, including the U.S. solar company. SunPower previously forecast a 2010 earnings outlook that would be heavily weighted to the second half of the year and revenue recognition from its systems business, as opposed to module sales, being the key driver of that second half-leaning earnings.

If there is going to be upside to the SunPower earnings, it would be predicated on the high demand level in solar providing modest revenue outperformance from SunPower, with module sales higher than expected.

The introduction this year by SunPower of lower-cost, lower efficiency Serengeti modules could provide a revenue kick, as could any booking of revenue from systems business recognized ahead of schedule. Given the extent to which SunPower shares attract short interest, a revenue beat could provide a short-term trading opportunity. Current short interest on SunPower represents 36% of the solar stock's float.

Year-to-date, SunPower shares are down by roughly 45%.

Even taking into account the potential for SunPower to report revenue that is better than expected than the Street consensus of $401 million, analysts are more focused on SunPower's ability to lower its manufacturing costs as the pricing pressure is expected to increase across the solar supply chain in 2011.

Jefferies said in a SunPower earnings preview that even though the revenue upside exists for SunPower, it remains on the sidelines with the U.S. solar stock due to its manufacturing costs. "We would continue to recommend sidelines until its ability to compete in a lower asp environment is fully understood," Jefferies analyst Jesse Pichel wrote in a SunPower earnings preview.

Collins Stewart analyst Dan Ries is viewing SunPower in a similar way, writing that a "decent quarter" is the expectation, but the long-term SunPower view remains one of caution: "The company has diversified downstream to reduce its dependence on module sales and now entered a manufacturing partnership to help improve its cost, but we believe the inherent problem is structural and will continue to limit its cashflows and returns. From a valuation standpoint, based on GAAP results, we believe the company trades at a premium to key peers, which dissuades us from having a more positive rating on the company."

The earnings headline for SunPower has always been a bone of contention. The Street consensus of non-GAAP 10 cents earnings from SunPower does not take into account executive compensation. On a GAAP basis, the Street expectation is a loss of 13 cents.

SunPower guided to second quarter revenue of $380 million to 420 million, gross margin of 20% to 22%, and non-GAAP EPS of five cents to 12 cents.

SunPower's most recent third quarter outlook was for revenue of $450 million to $490 million, gross margin of 18% to 20%, and non-GAAP EPS of eight cents to 15 cents.

For the full year, SunPower has previously guided to revenue of $2 billion to $2.25 billion, gross margin of 20% to 22%, non-GAAP earnings per share of $1.25 to $1.65, and a GAAP earnings range of a loss of 20 cents to a gain of 25 cents.

It was a losing day for SunPower on Tuesday ahead of its after-hours earnings report, but it was a losing day for all solar stocks. The macroeconomic outlook spooked the equities markets, leading to big losses in the major indexes, and the typically elevated selling in solar when the Nasdaq is down.

-- Written by Eric Rosenbaum from New York.

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