SolarCity Outshining Rivals Ahead of 2Q Earnings

NEW YORK (TheStreet) -- SolarCity (SCTY), which recently surpassed the $3 billion market cap milestone, reports earnings after the close Wednesday. Along with monitoring the solar energy provider's second-quarter results, investors will be carefully looking for guidance from management about the remainder of the year.

SolarCity was slipping 2.5% to $44.03 in Tuesday afternoon trading, trimming the stock's meteoric 451% advance since its December initial offering. Analysts are expecting the company to post a loss of 38 cents a share on revenue of $27.44 million, according to a consensus estimate at Yahoo! Finance. For its first quarter of 2013, the company posted a loss of 41 cents a share on $30 million in revenue.

Solar stocks have been performing well recently in anticipation of solid earnings from SolarCity and First Solar ( FSLR). But where First Solar's results rely almost entirely on prices of solar panels and quantities sold in competition with Chinese manufacturers, among others, SolarCity's business actually benefits if solar panel prices drop.

An article in The Economist in November saw the huge potential in solar generally:

... it is in the field of solar energy, currently only a quarter of a percent of the planet's electricity supply, but which grew 86% last year, that the biggest shift of attitude will be seen, for sunlight has the potential to disrupt the electricity market completely.

According to that article, the cost to manufacture silicon voltaic cells per watt has dropped from $76 in 1977, to 74 cents today and will likely continue to fall as manufacturing increases and manufacturing technology improves.

SolarCity doesn't make panels. They buy them. The company's business model is to install solar systems for business and residences and lease its products to customers. CEO Lyndon Rive described SolarCity as "an energy company" in a March interview with Adam Lashinsky on CNNMoney.

"We sell you electricity," he is quoted as saying. "Your utility does exactly the same thing. What they do is they build that infrastructure, they go out and arrange financing beyond the infrastructure and then sell you per kilowatt hour. But you don't think of your utility company as a financing company."

If solar array costs drop, SolarCity can either increase its profit margin or lower customer rates to make it more competitive with traditional utilities.

SolarCity has secured a number of large-scale contracts recently, including a partnership with Honda ( HMC) to create green electricity outlets for their electric car customers. SolarCity is also currently building its first utility-scale project for the Kaua'I Island Utility Co-operative (KIUC), a 12 megawatt plant that presumably will be installed and leased to KIUC who then sell the energy to its customers. The plan is for it to provide 6% of the island's total energy needs (68,000 inhabitants, one article says).

The company also has close ties with Tesla ( TSLA), as the car company CEO Elon Musk, is SolarCity's board chairman and cousin to the company's founders. The company is incorporating Tesla's battery technology into its residence installations and has supplied the equipment for car charging stations that Tesla is currently rolling out nationwide.

Most significant for second-half 2013 guidance is SolarCity's program, announced in June, offering free installation for homebuilders. Builders incur no upfront costs for a solar installation; the cost is recouped from owners' electric bills. If the company sees a large percentage of new-home buyers choosing to go solar, it could spell a huge increase in confidence for the company and hasten the day when it turns a profit.

The arrangement for free installation requires a network of financing agreements which could still prove to be the fledgling company's Achilles heel. Google ( GOOG), U.S. Bancorp ( USB), Goldman Sachs ( GS) and Bank of America Merrill Lynch ( BAC) are among SolarCity's major partners in its financing efforts, which currently total $1.28 billion.

Part of the attraction for investors however, came from federal incentives, including a 30% federal tax credit and a grant program. The tax credit turns to 10% -- the same as fossil fuel -- for 2017. CEO Lyndon Rive has maintained that the 30% rate is an important element to keep up the momentum for the solar industry. We can assume it is equally important part of the company's attraction to its financing partners.

While the grant program expired at the end of September 2012, the Treasury has begun investigating whether companies like SolarCity overvalued the equipment they were installing. The company said in a press release last year that while there is no indication it has done anything wrong, if the Treasury brought a civil action against SolarCity as a result of the investigation, the company could have to repay money along with penalties.

Earlier this year, SolarCity fought back, suing the Treasury Department. The company claims it did not received the money it was promised due to changes in the way the Treasury valued solar arrays.

Investors seem pleased with the stock generally, but bears love to short solar. Roberto Pedone of TheStreet's Stockpickr notes significant short interest in SCTY. If results are greeted positively, the shorts could bail, sending the stock up dramatically.

-- Written by Carlton Wilkinson in New York

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