SunPower Crushes Expectations but That's Only Half the Story

The first quarter was another blowout for SunPower (NASDAQ: SPWR  ) , which shouldn't come as a surprise to anyone who follows the company closely. Not only has SunPower made a habit of setting extremely low expectations that it can leap over, trends in the solar industry have improved dramatically in the last three months alone. Global demand is up, panel prices are up, and institutions are lining up to finance the next round of solar installations.

Add all of this up and you get results like the 19% increase in revenue to $683.7 million, gross margin of 22%, and net income of $75.3 million, or $0.49 per share, all on a non-GAAP basis, which I'll use here. What's remarkable is that SunPower has quickly swung from a loss to an 11% net margin, which is high even for the best manufacturing company.  

But the headline numbers don't tell the whole story at SunPower so let's dig into what happened last quarter.

SunPower's headquarters is lined with high-efficiency solar panels. Source: SunPower

Generating value in solar
One of the challenges for any solar company is to generate as much value as possible for shareholders, not only on making panels or building projects, but also through owning projects long-term. SunPower has done this in the past by selling panels but also by building and selling projects like the 579 MW Solar Star projects or the 250 MW California Valley Solar Ranch. The recent strategy will still involve building projects but they may not be sold in the same way.  

Solar Star will be the world's largest solar plant when completed. Source: SunPower

Past projects were sold when they were still under development so buyers were taking more risk and required a higher rate of return. Today, SunPower can generate more value by holding onto projects until they're completed and demonstrating consistent energy production. That's what the company is doing with the 135 MW Quinto project and the 100 MW Henrietta project, which it will build on the balance sheet.

The plan once these projects are done is to sell them or push them down to a HoldCo or YieldCo. A HoldCo will initially be a company owned entirely by SunPower with the option to sell a portion to a strategic buyer or go public. A YieldCo would be a public company that owns projects and pays a dividend to investors, much like an MLP in upstream or midstream energy.

There's good and bad news from this plan. The good news is that a HoldCo or YieldCo could maximize project value over 25 years or more and provides a consistent stream of revenue and earnings. If you're a long-term investor -- like I am -- that's good news. The bad news is that SunPower would be foregoing immediate impact on the income statement for that long-term stream of cash. So, SunPower's stock may not reflect the value being held on the balance sheet.

The same exact situation is taking place with solar leases, which don't generate any immediate value on the income statement -- in fact they're a drag short-term -- but generate revenue for 20 years or more. SunPower has $628 million of residential solar contracts alone, but we don't have a good idea what those contracts, commercial leases, or utility scale projects on the balance sheet are really worth because SunPower doesn't give a retained value figure like SolarCity does.

SunPower's challenge communicating value
What SunPower has a challenge doing is communicating what projects on the balance sheet are worth. Competitor SolarCity (NASDAQ: SCTY  ) explains value by calculating retained value, which is all future cash flows discounted at 6%. Then they assume that leases will be renewed (a stretch in my opinion) and give a value for that renewal as well.

Rooftop installations like this one are a growing percentage of installations at SunPower. Source: SunPower

I asked SunPower CEO Tom Werner about why SunPower doesn't provide a similar calculation and he said that SunPower will provide value figures as the HoldCo strategy plays out over the next year but it may not be the same as SolarCity's.

For now, management alluded to a $2 per watt margin for utility scale projects on the balance sheet, which implies $470 million in potential margin from Quinto and Henrietta alone.

We need to make similar assumptions for residential and commercial projects, where retained value isn't given either. What SunPower did do this quarter was give Holdco pipeline under contract of 172 MW in residential, 81 MW in commercial, and 264 MW in utility. If we assume $2 in retained value that would be $1.03 billion in retained value that will be held on the balance sheet when all contracted projects are built.

Look for more information on the value SunPower is holding on the balance sheet in the future but don't expect a wholesale change in what they report. Management is happy hitting, or exceeding, earnings guidance and holding on to future value on the balance sheet. It's a conservative approach, which probably isn't bad considering the turmoil the solar industry has gone through in the last five years.

Foolish bottom line
While the numbers at SunPower were phenomenal in the first quarter and 2014 will be a record year, I think there's even more value hidden on the balance sheet than investors know about. Over the next decade, that value will slowly hit the income statement but it will take time.

I'd also expect panel capacity to expand at 20% to 30% through 2020 and total value added should track that growth or exceed it with products like C7 improving growth figures.

First quarter numbers, industry leading technology, increased guidance, and the amount of value SunPower is holding on its balance sheet make this the top stock in solar. When you consider all of that upside and the fact that the stock trades at just 17 times trailing non-GAAP earnings this is a great value for investors interested in solar.

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  • Report this Comment On April 28, 2014, at 8:21 PM, sabertoothtiger2 wrote:

    Thanks, Travis. Your read on the solar industry has been spot-on for the 5 years or so I've been reading your analysis.

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