SunEdison's Drop Today is No Reason to Panic

SunEdison (NYSE: SUNE  ) lowered its fourth-quarter and full-year guidance yesterday, and the stock has been punished with a drop of 6.2% as I'm writing. It didn't help that the guidance downgrade coincided with a proposed $400 million convertible notes offering, which is intended to pay off current debts but could come with major dilution for existing shareholders.

Is this a reason to sell off shares of SunEdison or other solar stocks? To answer that we need to take a long-term view.

The new solar financing of choice
SunEdison's proposed convertible notes offering comes in the same year that SunPower  (NASDAQ: SPWR  ) and SolarCity  (NASDAQ: SCTY  ) have made similar transactions, so it's certainly not alone. Solar companies are using convertible debt more frequently because it doesn't come with the same high interest rate as normal debt and gives a lot of growth flexibility if stock prices go up and the debt is converted into equity.

The downside for investors is that convertible debt acts like a share offering if the stock goes up and limits upside for investors.

A shift to owning solar systems
Another reason for these solar providers reliance on convertible debt is that it's relatively cheap financing for projects either in development or added to the balance sheet. In SunEdison's case, that's exactly the reason for the guidance downgrade.

SunEdison decided to keep solar projects on its balance sheet in the fourth quarter instead of selling them. There's no change to the amount of projects the company plans to finish, but systems sold guidance is being reduced from 234 MW-264 MW to a range of 209 MW-234 MW.

There is weakness in the company's semiconductor business, but I don't think that's enough to change the investment thesis since the segment will be spun off early next year.

Foolish takeaway
SunEdison's convertible notes offering doesn't excite me, but I don't think it's a reason to be concerned about the company's future. The same goes for the decision to keep solar systems on the balance sheet instead of selling them. In fact, that will probably generate more value for shareholders in the long term.

In short, don't panic over today's stock move. The long-term picture for SunEdison is still improving and none of yesterday's announcements change that.

Energy stocks for your watchlist
Looking for more energy stock ideas? The Motley Fool is offering a comprehensive look at three energy companies set to soar as the energy industry evolves and we detail them in the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2762798, ~/Articles/ArticleHandler.aspx, 9/16/2014 5:53:12 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement