(SunPower story updated for Wedbush, Barclays analyst comments, and updated trading losses)SAN JOSE, Calif. ( TheStreet) -- SunPower ( SPWRA), with more than a 15% decline in share value on Friday, has reached its inflection point in respect to the larger inflection point for the solar industry. Weak 2010 guidance and consolidated gross margin deterioration were culprits in the dim investor outlook on SunPower in the immediate aftermath of its fourth-quarter earnings. Some commentators said after the disappointing 2010 outlook from Sunpower, the freefall in shares represented a short-term negative phenomenon. Yet the larger debate is really about multiples that can be justified on solar stocks increasingly framing their business with a lower-margin energy construction focus. While SunPower reported somewhat benign results of a four-month-long audit investigation into accounting mistakes made at its Phillipines plant, there was no relief rally in sight for the U.S. solar stock from the resolution to that nagging issue. All the focus coming into SunPower earnings was on the accounting resolution. Ironically, it turned out be a non-issue in the beating SunPower shares have taken as a result of the company's 2010 outlook. Analysts, for their part, were divided in their reaction to the SunPower outlook. It wouldn't be solar, or most industries for that matter, if there was not a healthy debate about what the same set of numbers represented: an opportunity to buy or the time to bail on a hard-to-justify share price story? One solar analyst noted that SunPower came in well below Street guidance, and that even more concerning is that the Street guidance did not include any modeling of SunPower's recent acquisition of European solar project developer SunRay, while SunPower's guidance did in fact include SunRay business. SunPower has forecast earnings per share of five to 35 cents in 2010, a starkly sober outlook, according to some solar analysts, for a stock that has traded as if it were a technology company. Analysts estimated earnings per share of 17 cents in the first quarter 2010 alone. SunPower said the first quarter would be a break-even quarter. "It's hard to justify a $20 stock view on SunPower. They found the root accounting problem, spent several million to fix it -- $3.6 million -- and think they have it solved. But the quality of earnings is low, and investors are likely to bin this stock with the likes of Energy Conversion Devices and Evergreen Solar," the analyst said. Being lumped with Energy Conversion Devices ( ENER) and Evergreen Solar ( ESLR), two U.S. companies fighting for survival, may be a stretch. SunPower has a pretty healthy balance sheet compared with those two embattled U.S. solar companies.
Facing headwinds of that nature was certainly not SunPower's attitude on the conference call after its earnings. Investors should keep in mind, of course, that SunPower has a reputation for being about as "rah-rah" as it gets, when it comes to its approach to earnings conference calls as an investor relations pulpit. "SunPower thinks the sun is always shining. It's not in SunPower's nature to ever cry uncle, so I don't expect them to cry uncle today," said an analyst ahead of the earnings conference call. SunPower management stated during the conference call that it is in the best position in the solar industry during this transitional period for solar companies. Instead, investors were transitioning out of SunPower on Thursday and Friday. The selling action in SunPower shares was more than four times its average daily volume of 2.2 million shares traded by Friday afternoon. Wedbush Securities downgraded SunPower to sell due to concerns about margins, ASP declines and overcapacity in solar in the second half of 2010, when SunPower expects to heavily tilt its revenue recognition. Oppenheimer & Co.'s solar research group said it was staying on the sidelines with SunPower shares. "While most peers expect sequential growth in 1Q/2Q, SunPower is experiencing the opposite due to a push-out of systems revenue from 1H to 2H. We remain on the sidelines given: 1) disappointing guidance; 2) a high cost structure; and 3) lumpy systems business." SunPower noted during its conference call that project finance was delayed while it had invalid financial statements, and due to overall financing conditions. These financing hiccups have pushed projects back from their original timeline and revenues out to the second half of the year. Oppenheimer took down its full year 2010 earnings estimate to $1.45, from $1.73. Some solar bulls remained behind SunPower and its story. Jesse Pichel of Piper Jaffray conceded that SunPower shares will be "weak near term on the below-consensus guidance; however, we believe that SunRay's 1.2 GW pipeline and EMEA presence should greatly increase SunPower's visibility into 2010 and 2011 growth."
Alas, SunPower did not provide much visibility on the SunRay acquisition. SunPower did not break out the level of projects it expects to be developed in 2011 from SunRay, and 60 MW of the 80 MW projected for projects in 2010 were already known about by the Street. "It could be 1 gigawatt, or it could be 100 megawatts," said Wedbush analyst Christine Hersey. "If you're buying a project pipeline, you should have some idea," said Hersey, adding that First Solar, after its acquisition of OptiSolar's project pipeline, provided some project estimates, though in some cases it was a non-specific regional lumping of projects. In fact, Piper Jaffray increased its price target to $25 from $22 on higher volume and better-than-expected margin outlook. The better-than-expected margin outlook is a debatable point, to say the least. FBR Capital Markets headlined its SunPower earnings wrap Finally, Margin Capitulation. Barclays Capital analyst Vishal Shah took the buying opportunity argument, writing, "We believe the cost structure, pricing premium and market opportunity is not well understood by investors." One could argue back that if SunPower's cost structure, pricing premium and market opportunity is not well understood by investors, that's a sign of, in the least, poor investor relations, which is part of their job. The Barclay's analyst noted that SunPower is putting more of its modules into systems business -- or project development -- where margins have improved from Q3 to Q4 and are expected to continue rising in 2010. However, the Barclays analyst did not mention, as more skeptical analysts have commented, that the systems business is much more expensive, and as compared to component margins, a much lower margin business. Barclays maintained its buy rating and $28 price target on SunPower. Barclays Bank has been a lead manager or co-manager for SunPower securities offering in the previous year and SunPower is an investment banking client of Barclays.
SunPower said on the conference call that it may tap the capital markets in a debt offering this year, a new financing twist from the solar company. Wedbush's Hersey said that she is struggling with the cost structure of SunPower, and she is not struggling for a lack of attempts to understand it. Wedbush's Hersey said all the debate comes back to SunPower's cost structure. It wasn't just gross margins that took a hit, but operating margins in 2009 that were less than half the level of 2008. "They have to admit that margins are not developing how they thought they would have been, and the question is can SunPower be fairly valued over $20?," said one solar analyst who does not actively cover SunPower, but is familiar with the issues. "In 2006, 2007 and up until the end of 2008, solar investors were not focused on cost structure," the Wedbush analyst said. "It was just, how quickly can you expand capacity and get modules out the door? Where are you getting your polysilicon from and do you have enough poly for next year?" Wedbush's Hersey noted that it was in the third quarter of 2009 that SunPower first provided the piece of data that it would reach $1 per watt cost structure by the fourth quarter 2014. "If they are saying they will reach $1 per watt in their cost structure by the end of 2014, how competitive will SunPower be in the interim?" Hersey asked. "Even if SunPower's cost does come down on a linear basis, I'm not convinced the average sales price reduction will not be greater, and they will fall behind competitors. The other module markers all have an incentive to drive down ASPs in order to win market share." Lower cost Chinese solar players -- albeit less efficient module markers -- expect to reach that cost structure by the end of this year, Hersey noted.
Another question posed by the Wedbush analyst relates to SunPower's need to source more solar panels from third-parties to meet its capacity plans, which will also push down the margins SunPower can achieve on the component side of its business. "We are reducing our estimates across the board, mainly driven by lower margin assumptions," FBR analyst Mehdi Hosseini wrote. However, FBR noted that the margin "capitulation" was also incrementally positive, as it allows the Street to reset the bar. FBR referred to the most recent SunPower numbers as "final margin capitulation." FBR remains on the sidelines with SunPower shares and indicated that a better price point would be in the range of $17; Wedbush took its SunPower price target down to $15. FBR 's revised 2010 earnings estimate decreased from $1.93 to $1.41. Citigroup, already at a sell on SunPower, reduced its price target from $18 to $15. Citi analyst Timothy Arcuri was focusing on SunPower's increasing reliance on margin from its systems business, and module margins headed to the range of 15%-20% -- module margins had been as high as 35% in 2008. Given the new SunPower margin profile, the Citi analyst found it harder to justify the premium at which SunPower was trading versus Chinese solar players. The Citi analyst argues that SunPower's multiple was "unjustified given that gross margins for the Chinese players are as good or better than SunPower -- and likely to remain so for the foreseeable future." -- Reported by Eric Rosenbaum in New York.
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