At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Two cheers for Solar
Pity the solar power puffers. Like the rest of us, they're licking their wounds this morning, burned by the Dow's 200-point drop. Yet by all rights, they should be swimming in paper profits, as two of the biggest names in solar received upgrades yesterday.
In quick response to a pair of earnings reports, first LDK Solar
According to Ardour, Sunpower is experiencing "increasing scale and throughput." Moreover, it's "UPP pipeline" (utilities and power plants) "continues to build," while "the 2011 outlook supports robust revenue and EBITDA growth, and the risk/reward has become attractive." Translation: Sunpower is growing briskly, and Ardour thinks this is a good thing. But me ... I'm not so sure.
Let's go to the tape
Why the skepticism over Ardour's, er, ardor? Basically, I've got three reasons. First, the analyst's record is just not that hot. Consistently ranked as one of Wall Street's worst analysts, Ardour Capital gets only about 35% of its recommendations right. And while it's slightly better on solar stocks ...
|
Company |
Ardour Says |
CAPS Says
|
Ardour's Picks Beating
|
|---|---|---|---|
|
Evergreen Solar |
Underperform |
*** |
(13 points) (two picks) |
|
Energy Conversion |
Underperform |
*** |
(3 points) (two picks) |
|
Yingli Green Energy |
Outperform |
**** |
45 points (three picks) |
... the fact remains: Over the three years we've been tracking Ardour's performance, even in solar, the analyst has gotten about two picks wrong for every one it got right. And the last time Ardour recommended buying Sunpower, in particular, investors who followed this analyst's advice got burned for a 27-point loss to the market. Not good.
Forecast: Partly debt-y with a chance of revenues
Of course, it isn't Sunpower's fault that a not-particularly good analyst has decided to talk up its stock. What is Sunpower's fault, however, are the results the company is posting:
- Q2 2010 sales: Up 28% year over year ...
- Gross profit margins: Up 930 basis points, but ...
- Actual profits: No such luck. Despite wildfire revenue growth, Sunpower failed to beat or even match last year's $14.3 million profit, instead losing $6.2 million in Q2.
And check out the balance sheet, where we see Sunpower's cash pile shrinking $74 million from this time, last year, long-term investments of nearly $52 million basically vaporized, and long-term debt rising nearly $50 million. All of which suggests the company's burning cash again (even if management declined to include a cash flow statement in its earnings release to confirm this).
All this leaves Sunpower with a sizable debt load, roughly five times its annual earnings before interest, taxes, depreciation, and amortization (EBITDA), according to Capital IQ. Not as bad as other companies in the solar space are doing, admittedly -- Evergreen sports a 16.8 ratio, for example, while Energy Conversion and Yingli remain earnings-less -- but Sunpower's numbers don't compare favorably to the kinds of companies it more regularly competes with. Suntech Power carries a similar debt load (about 5.2 times EBITDA), but both Trina
Accounting shenanigans?
Which brings us to my third and final concern: What Sunpower is doing about the debt issue. Historically, one of the really big problems afflicting Sunpower and its solar kin has been the need to spend beaucoup bucks up front to ramp production, grow sales, spread out costs, and improve margins. To an extent, this week's numbers show progress on that front. But to further control costs, Sunpower announced Monday that it's taking the further step of setting up a joint venture "Fab3" factory with AU Optronics, sharing the cost of future capital spending with its new partner.
Which is a fine plan, as far as it goes; but what I find more interesting is Sunpower's decision to saddle its new JV with the debt incurred in building the factory. Commenting on the plan, investment banker Kaufman Bros. (a much better analyst than Ardour, as our CAPS scorecard shows), observed that Sunpower's plan seems designed to keep new debt off-balance sheet for Sunpower, even as the company remains ultimately responsible for its share of the debt.
Foolish takeaway
Now maybe this is all above-board and business as unusual. But given Sunpower's history of accounting shenanigans, I have to consider the possibility that what's really going on here is a thinly veiled attempt to make Sunpower's profits picture appear prettier, while playing "hide the debt" on its obligations.
That seems to be Kaufman's take on the issue, as the analyst bucked the bullish trend on Wall Street and held firm to its "hold" rating on the stock. Given Kaufman's superior (to Ardour) record as a stock picker, my own reservations about Sunpower's JV gambit, and the stock's rather leveraged balance sheet, I think "hold" is the right call to make here.
