From Credit Suisse on Friday:
SunPower Corp. (SPWRA)
DECREASE TARGET PRICE
Italian project pull-ins drive Q3 upside, but
2010 outlook remains essentially unchanged
Bottom line – remain Neutral.
Q3 was a significant beat helped mainly by revenue pull-ins of Italian projects, but also better than expected pricing in R&C and UPP. But 2010 midpoint of 2010 EPS is now $1.55 vs precall guidance of $1.50, only a modest revision, as Q3 upside was largely a pull-in from Q4. 2011 guidance from SPWR’s analyst day on Thursday next week is the next catalyst – we are modeling $1.71 for CY11 EPS (revised from $1.44). We expect guidance likely to be a range of $1.60-$2.00. China solar companies are trading at ~6x (or less) CY11 earnings; SPWR has had a higher multiple which has been compressing steadily; at a PT of $15 (cut from $16.50), SPWR will be at ~8x potential CY11 earnings power and off potential sum-of-parts.
Notable project finance update.
SPWR is about to close on a €200mm piece of project debt that is currently being marketed to institutional investors. The debt has two tranches, with one taken down by the EIB (European Investment Bank). If successfully closed, this could set a positive precedent and an important step in the maturation of the project finance market for utility scale solar PV applications in Europe. WFR could also look for similar financing methods for its Italian projects in 2011.
C3Q10 review.
Better R&C pricing and Italian project pull ins drove Q3 upside. C3Q rev/non-GAAP EPS of $551mm/26c was above cons at $472mm/9c. Revenue by segment was as follows:
(i) Residential and commercial - $292mm, up 11% q/q (vs CS at $301mm), GMs 24.3% (vs CS 21.2%);
(ii) Utility business $261mm, up 106% q/q (vs CS at $169mm), GM 20% (vs CS at 18.4%). The better gross margins were driven by pricing which was down less than expected in R&C segment.
Part of the revenue upside also came from slightly higher production and work down of inventories as R&C segment is very strong in 2H10.
C4Q10 outlook.
Company guided C4Q rev/EPS to $870-$970mm and 95c-$1.15. This was below street consensus at $935mm and $1.10. Recall SPWR does not provide specific guidance by segment. Note that there is little value in rewarding or penalizing SPWR for quarterly hits and misses on earnings as the systems revenue will be lumpy, but we will hold SPWR to annual revenue/EPS guidance.
For the full year, SPWR’s prior non- GAAP EPS guidance was at $1.35-$1.65 – company raised the low end of this range to $1.45.
Positives.
(i) Company generally appears to be confident on 2011 outlook due to its pipeline in the UPP and commercial businesses (approaching 5GW now). Company is generally getting positive indications from its dealer channel for 1H11 business, consistent with commentary from other solar firms.
(ii) Company is likely to close a €200mm project debt very soon. SPWR is seeing interest from institutional investors in Europe and US, and is able to achieve low double digit unlevered returns on its UPP projects;
(iii) SPWR will not be as dependent on Germany in 2011.
Negatives.
(i) Every company has to be exposed somewhere – if not Germany, SPWR will be over exposed to Italy in 2011. At the moment we do not expect issues with policy in Italy, but we need to monitor the volume of shipments going into Italy;
(ii) Cost/watt trends – this is a controversial topic which we hope company will provide more color on in 2011. Company’s assumptions on getting to “efficiency adjusted cost/watt” appears much more aggressive at first glance than what investors generally believe is the efficiency penalty for solar. |
