SunPower Is a Buy on High Margins and Positive Cash Flow

Solar demand is on the rise due to China's ambitious solar objectives. The U.S., Australia, and Japan are also expected to increase solar power generation. Cost per watt is declining, and prices are expected to come down. As a result, industry margins will remain flat going forward. Solar players with downstream businesses will benefit more from the industry's high growth rate due to their higher margins.

SunPower (NASDAQ: SPWR  ) , the second-largest U.S. solar panel manufacturer, is in a unique position to capitalize on the growth of the industry. The company plays downstream, has a seasoned management under the current CEO, and leading-edge solar efficiencies. It is backed by Total S.A. and has a cost-effective opportunity to expand its footprint to high-growth emerging markets. Moreover, solid financial performance and bold moves like the exploration of energy storage solutions are the reasons why SunPower will be a successful solar player going forward.

Recent financial and operational performance
SunPower posted revenue of $692 million in the first quarter of 2014 as compared to the $635.4 million posted in the same quarter last year. This translates to year-over-year growth of around 9%. The company generated 68% of this revenue from the Americas.


Data from SunPower

Increased demand resulted in revenue growth. SunPower improved its gross margin to 23.5%, which is higher than other solar players, because it is involved in downstream. It doesn't only sell panels, it also sells balance of system equipment and inverters, and therefore enjoys higher margins than panel manufacturers.

The company posted EPS of $0.42, compared to a loss of $0.46 in the same quarter last year. Strong execution, along with improved demand and price conditions resulted in this improvement. Note that this will not be the case for other solar companies, such as Yingli Green Energy  (NYSE: YGE  ) , and only downstream players will enjoy higher EPS amid higher margins associated with the business.

Cash and balance sheet
SunPower has a cash balance of around $797 million and a current ratio of 1.35. It does not face any liquidity problems. The important point is that the company generated free cash flow, or FCF, of around $97 million in the first quarter of 2014. The ability to generate positive FCF has eluded most solar players and is a big plus for SunPower.

 Strengths and future prospects


Source: SunPower

SunPower has around 7.5GW of global projects in the pipeline, which is even larger than the project pipeline of First Solar (NASDAQ: FSLR  ) , at around 3GW. This indicates that SunPower will have stable revenue going forward as it gradually completes its projects.

The fab capacity is expected to increase to 1.7GW by 2016. The additional capacity is expected to result in 35% cost savings on panels. Cell efficiency will be improved to 25%. The company is likely to maintain its efficiency lead as it continues to reduce production costs.

In an interview, the CEO of the company said that SunPower will be adding energy storage solutions to its solar offerings.

This development will have several implications. By addressing the storage needs of home and commercial owners, SunPower is effectively enhancing its revenue-generating ability through storage. Storage solutions will become more efficient and cost-effective as solar companies focus research and development efforts in this area. The company is building a storage-related pilot project in Australia.

SunPower is the first solar company to acknowledge and become actively involved with energy storage, and it is likely to reap rewards in the long run.

Bottom line
The solar industry is set to grow due to anticipated future demand, but margins will be capped because of price pressures. Companies with a downstream business and sales of inverters and other equipment along with panels are expected to enjoy higher margins. SunPower is a secure solar company with minimal downside risk, differentiated efficiencies, a strong project pipeline, and cash-generating ability. Its storage-related solutions are expected to make the company even more profitable in the coming years. In a nutshell, SunPower is poised for future growth because of its differentiated products and high-margin business model.

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