The pic above is of one of SunPower’s largest solar installations — it’s in Bavaria, Germany. Looks like we’re about to land in beautiful country, doesn’t it? Germany is a hot spot for the solar power industry because of the very generous government subsidiaries. Onto the business at hand while I’ve got a captive audience “aboard”…
SunPower in a Snapshot
SunPower Corp. (Nasdaq: SPWR) is involved in the design and manufacturer of solar power products primarily in the US, Germany, and Asia.
The company, which is a subsidiary of Cypress Semiconductor (NYSE: CY), is not an upstart like many in this industry – it’s been around since 1985. It’s based in San Jose, the heart (or shall we say, “sol”) of California’s Silicon Valley.
The company’s product lines include: solar cells, solar panels, and inverters; imagining detectors (based on solar power tech) for medical apps; and infrared detectors for computing and mobile phone apps.
The company’s subsidiary, PowerLight Corp, offers a wide range of full solar power systems for commercial, industrial and residential markets. Systems include roof-mounted, roof-integrated, day lighting systems with translucent solar panels (these sound cool), among others.
PowerLight also provides various services such construction management, maintenance and monitoring, etc.
Two Ways to Invest
You can buy stock in either SunPower or its parent company. SunPower’s stock trades on the Nasdaq under the ticker symbol SPWR. Cypress’s stock trades on the NYSE under the ticker CY.
Power Purchase Agreement (PPA) Business Model
This model should be called PPPA — with that first “P” for “powerful!”
This model involves no upfront cost for the customer (commercial and public agencies only, so Harry and Harriet Homeowner can’t get in on this one). And we’re not talking pay nothing now, but pay through the nose later, ala credit cards and other high-interest rate gimmicks.
Here’s how it works:
- The funding: In late Nov, SunPower secured $190 million from Morgan Stanley to fund this program.
- SunPower & Morgan Stanley will jointly own a holding company that will finance solar power projects.
- The holding company will buy SunPower’s systems and lease them to the customer at no upfront costs.
- The customer will have to purchase its electricity (generated from the solar system) from the holding company for a specified number of years.
So, essentially, this program puts SunPower in the energy sales business. The program appears win-win: SunPower makes money and, reportedly, the customer saves money (per my Dec. 1 piece, Hewlett-Packard, which is getting a solar array at one of its facilities under this program, expects to save $750,00 in energy costs over 15 years — and that’s at just one site.)
A PPA program eliminates what has been THE major impediment for the growth of the solar power industry — the high upfront cost.
So, investors should consider investing in companies that have PPAs.
Some Financial Stats
- Stock return of 238% over the past 1-year period (to Dec 14) vs. the S&P 500’s (a proxy for the overall market) return just shy of 3 %.
- Operating margin of almost 3.9% (over 1-year period) — this is a bit too thin for my comfort level and should be watched to see if it grows.
- Return on Equity (ROE) of 2.4% — same comment as above, especially considering the company’s debt/equity ratio (0.5) (debt increases ROE).
- Most recent quarter’s revenue was up over 258% (compared to same quarter of last year)
- Most recent quarter’s earnings (Net Income) down almost 12% — a negative and should be investigated further by anyone considering investing.
- Financial liquidity is good with a current ratio of 4.0.
- P/E (price/earnings) of 647 (trailing 1-year period) and 62 (based on projected earnings over forward 1-year period) — this is a very pricey stock based upon P/E valuations.
- Beta of 2.0 (means the stock is 2x as risky — in the stock price fluctuation sense — as the overall stock market).
The Bottom-line
The two big pluses for this company’s stock: the torrid revenue growth and the PPA program. However, margins need to expand so that revenue growth translates into better earnings growth. The PPA program should help the company’s bottom-line going forward, but “should” is the key word at this point.
Investors may want to check out my piece on Suntech Power (NYSE: STP). Suntech has much better operating margin (12.9), ROE (21.3), and quarterly earnings growth (85%); its P/Es are more reasonable (89 trailing, 40 forward); and has an incredibly low beta (0.2). Suntech’s stock has returned 153% over the past year — not SunPower’s 238%, but a heck of a great return at much lower risk (compare the two betas — a 10-fold difference).
Time to fasten your seat-belt — we’ll be landing in Bavaria (pic) soon. Make that sunny Bavaria.
This article not a recommendation to buy or sell any securities.
