3 Reasons SunPower Will Continue to Lead the Solar Sector Higher

SunPower (NASDAQ: SPWR  ) shares have been hitting 52-week highs day after day. Shares of the San Jose, California solar company are up over 400% year to date while the sector ETF, the Guggenheim Solar ETF, is up 130% year over year. Sunpower, along with Trina Solar (NYSE: TSL  ) and SolarCity (NASDAQ: SCTY  )  are leading the way. Can this rally continue? 

Powerful tailwinds 
Behind the solar rally is a powerful cocktail of stabilizing margins, full utilization, and increasing government support. 

Over the past few quarters, there have been signs that margins have bottomed for the solar industry.  

SunPower's gross margins have increased from 15.1% to 19.5% year over year, while Trina Solar's second quarter gross margins increased from 8.4% to 11.6% year over year . SolarCity, which installs solar panels and does not produce solar equipment, has seen its gross margin hold steady around 40% quarter over quarter .

Both SunPower and Trina Solar are in full utilization, and there is speculation that both companies will start to expand megawatt capacity next year. 

Governments are also stepping in to help the sector with China recently announcing a 50% rebate on value added tax from October 1 2013 to the end of 2015.

Why SunPower?
SunPower has several key competitive advantages over its peers. 

First, it has an institution with deep pockets behind it. French oil giant Total owns 60% of the company and has actively increased its stake. Total can provide SunPower with financial support in bad times, while providing SunPower cheap access to capital to grow faster in good times. Total was there for SunPower in the depths of the solar market downturn by providing SunPower with a one billion dollar credit line in 2011 and will likely help SunPower again if the solar market takes a turn for the worse. 

Secondly, SunPower is the only vertically integrated leader in the solar sector. By being vertically integrated, SunPower can make a better product than anyone else by controlling quality. This advantage shows in SunPower's products, with SunPower panels having the highest efficiency at 24% and least degradation on the market. .

Finally, SunPower is the sector leader in the rooftop business. The rooftop industry has been growing over 40% year over year  and SunPower is the market leader in the rooftop business with a 22% share of the residential market and an 11% share of the commercial market. 

By having the most efficient and dependable panels on the market and an institutional backer with very deep pockets, SunPower has a commanding position where it should be able to continue to grow its market share as the market itself continues to grow. 

The bottom line
Stocks near 52-week highs must be doing something right. SunPower has had a rally for the ages in the past year. Given the current budget crisis concerns, SunPower may be due for a healthy short-term pullback as investors go into risk-off mode. Long term, however, SunPower will likely be a winner as its competitive advantages help it gain market share in a growing and promising solar market. 

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  • Report this Comment On October 09, 2013, at 9:31 AM, clanza875 wrote:

    1) Total currently does own any of SPWR's $880 million in debt. Its all convertible and doesnt look that cheap either from the interest rate they pay or the potential dilutive effects. Total also holds another 9.5 million warrants to purchase the stock at a price of 7.86. Thats close to 40 million new shares coming down the line assuming they can convert the debt. Thats a lot of dilution.

    2) Their quality product comes at a major cost. They're producing panels at a cost greater than which they can sell them. Funny, SPWR goes to great lengths to hide their manufacturing cost, I wonder why?

    3) There are no profits in the rooftop business at todays prices. Profits are in the utility/systems business so it reallly doesnt matter who the market leader is. The only reason SPWR was slightly profitable for one quarter was due to revenue recognition at CVSR.

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