SunPower: Mr. Heat Miser?

SunPower shares are at an all-time low, but should the U.S. solar leader be counted out?
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This is Part 1 of a two-part story about SunPower. Part 1 focuses on SunPower's challenges among its existing dealer network in the U.S. In Part 2 of the Sunpower story , the focus in on SunPower's shift to the large-scale solar project business.

SAN JOSE (

TheStreet

) -- It's gut check time for

SunPower

(SPWRA)

and its investors.

The company's shares hit an all-time low of $10.71 intraday Wednesday before clawing back to $11.30. That compares to an initial-offering price of $27 back when SunPower went public in 2005, and an all-time high of $133.61, reached on Dec. 7, 2007.

Shares of major solar-module makers have declined sharply in the past few weeks -- down 30% as a group, according to Collins Stewart -- beaten down by the euro slide and debt contagion and broader fears (on the extreme side, granted) of the dissolution of the European Union.

It's no surprise, then, that SunPower has been caught up in heavy selling -- with some analysts saying that the decline represented a buying opportunity. But the sharp drop in SunPower' stock price can't be written off as a euro event alone.

The company's May 11 earnings report and later conference call with analysts highlighted big questions about the company's business model.

Even

Deutsche Bank

(DB) - Get Report

analyst Steven O'Rourke, who met with SunPower officials just on Tuesday and came away with a positive view of the operation, described SunPower as having an "opaque business model."

O'Rourke conceded that few catalysts exist for SunPower shares over the near term, even though he rates SunPower stock a buy. The company, he said, remains "somewhat of a 'show me' story."

Take recent data from the biggest U.S. solar market, California, which is also SunPower's home state and bread-and-butter brand market.

Using information from the California Solar Initiative, part of the state's public utility commission, Auriga Securities analyst Mark Bachman estimated that the number of megawatts SunPower won in solar project applications had grown by 58% year-to-date over 2009. But the market as a whole surged 95%, suggesting a loss of market share on the part of SunPower.

SolarCity, a privately held solar-project developer that has owned the No. 1 spot in the residential category for years, has now surpassed SunPower in the combined residential-commercial category, according to the CSI's data, which ranks companies' relative market share by a metric known as "megawatts reserved," a forward indicator of sales.

According to Peter Rive, SolarCity co-founder and chief operating officer, previous to this year, SolarCity had generally ranked 5th or 6th when the residential and commercial data was combined.

SolarCity is agnostic on the provider of the solar module, using those manufactured by

First Solar

(FSLR) - Get Report

-- which bought a $25 million stake in SolarCity in 2008 -- as well as Japan's

Kyocera

and

Sharp

. In specialized installations, SolarCity often goes with modules from

Evergreen Solar

(ESLR)

.

"The solar panel itself hasn't been a game changer for years," Rive says.

But the most telling take on SunPower's problems in California comes from Randy Kauffman, CEO of privately held solar installation company

NextEnergy

.

In a summer 2007 press release, SunPower announced its "premier dealer program." The company selected Kauffman to provide a canned quote: "The SunPower Premier Dealer program is unprecedented in this industry ... It's a win-win situation all around."

SunPower's CEO Tom Werner also waxed effusive in the 2007 announcement: "I'm happy that our dealers share our enthusiasm for the Premier Dealer program and have heartily embraced it."

It's no longer a win-win or a very enthusiastic relationship for Kauffman, however. "SunPower is the No. 1 supplier in my network, but it's become a double-edged sword," Kauffman told

TheStreet

in a recent interview. "SunPower based their whole business on high efficiency modules and enjoyed fantastic profits, but dealers pay more for it, and we're sick of it."

With competition among solar installers in California as fierce as ever, Kauffman said, the high price SunPower charges for its panels has forced dealers to sacrifice their own profit margins in order to make competitive bids.

"Their business model is to throw solar modules out there and let dealers fight amongst themselves. And our margins have shrunk because the only way to win the competition is by drastically reducing cost, and we keep getting undercut, and that devalues my company," Kauffman said, adding that most of the dealers with whom he talks feel the same way.

On SunPower's earnings conference call earlier in May, Robert W. Baird analyst Michal Horwitz asked management why the PowerPoint slide showing SunPower dealers' gross margins never changed from quarter to quarter.

"It's interesting that we never see much change going on in the dealer margin ... in terms of the benefit to the dealer to maintain their position in the market," the Baird analyst said.

SunPower chief Tom Werner responded that his company's dealer partners would "not react favorably if we forecast their margins for them." He added, "There are more dealers and a more competitive environment and that will influence margins, and that's the last thing I will say about dealer margins."

James Pape, president of SunPower's residential and commercial segment, jumped in when Werner asked him to take a crack at answering. "As the market matures, expectations by dealers and by each job compress on margins, as the industry maturity is passed across the planet."

But those responses don't satisfy NextEnergy's Kauffman, who says he's steering more business away from SunPower, and looking to work more with solar-module companies in China.

"Chinese manufacturers are motivated to help and get into this market, and we are open to making new relationships because of SunPower's arrogance," Kauffman said. "Why should I give my margin to SunPower?"

Click here for

SunPower: Has it Become a Heat Miser? (Part 2)

-Reported by Eric Rosenbaum in New York.

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>>SunPower: Mr. Heat Miser?(Part 2)

>>First Solar Deals With Delays in China

>>Solar Losers: Trina Solar, SunPower

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