One Energy Stock to Keep Your Eye On

This article is part of our Rising Star Portfolios series.

It might have been Peter Lynch who said it, but investing involves turning over a lot of rocks. And for a portfolio that looks for situations where the market's expectations are too pessimistic, that means looking at a lot of companies.

Last week, I picked Transocean (NYSE: RIG  ) as the first stock in my Messed-Up Expectations (MUE) portfolio. At prices in the low $60s, the market is expecting very little growth in free cash flow (FCF) over the next several years. So, might there be other opportunities in the energy sector?

Looking around, I turned down Atwood Oceanics (NYSE: ATW  ) , another offshore driller, and SunPower (Nasdaq: SPWRA  ) . The former because the market is expecting nearly 30% growth in FCF per year for five years when it's only done barely 7% per year for the past three, and the latter because it's been FCF-negative for the past eight years, as well as the trailing 12 months.

First Solar (Nasdaq: FSLR  ) was also a non-starter as a MUE candidate. At 33% expected growth in FCF for five years, I think that's a bit much for a company without a consistent history of positive free cash flow.

But the energy sector is not totally devoid of possibilities. One that caught my eye was Power-One (Nasdaq: PWER  ) , a maker of converters for connecting the DC output of solar and wind farms to power grids, which use AC. It's rapidly moved from No. 9 to No. 2 in market share and just reported a very nice quarter. As for messed-up expectations, at current prices, the market's expecting less than 6% annual growth in FCF, while it's actually been growing that much more rapidly over the past several quarters. A bit risky, maybe, as it doesn't have a long history of positive free cash flow, but intriguing nonetheless.

Before purchasing, of course, more due diligence is needed. One thing I am still figuring out is the way the company views itself going forward. Is it now a solar and wind energy play, or does its legacy tech business still have legs?

Add Power-One to your watchlist and then come join the discussion on this company and others hiding under rocks, over at my Rising Star Portfolio discussion board.

Fool analyst Jim Mueller owns shares of Transocean. First Solar is a Motley Fool Rule Breakers recommendation. Atwood Oceanics is a Stock Advisor pick. The Fool owns shares of Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policyhas never considered itself messed up, at least when it's comparing itself to other disclosure policies.


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  • Report this Comment On November 08, 2010, at 6:28 PM, jrmart wrote:

    You state in the article above...SunPower's FCF has been negative for the past eight years, as well as the trailing 12 months.

    Investors BEWARE...When it comes to Wall Street, it's really all about future earnings, not just past results.

    I suggest you read the following before making any sell/buy decisions about SunPower.

    UNITED STATES SECURITIES AND EXCHANGE COMMISSION

    November 4, 2010

    ORDER GRANTING CONFIDENTIAL TREATMENT UNDER THE SECURITIES EXCHANGE ACT OF 1934

    SunPower Corporation

    File No. 001-34166 - CF#25600 _____________________

    SunPower Corporation submitted an application under Rule 24b-2 requesting confidential treatment for information it excluded from the Exhibits to a Form 10-Q filed on August 13, 2010, as amended. Based on representations by SunPower Corporation that this information qualifies as confidential commercial or financial information under the Freedom of Information Act, 5 U.S.C. 552(b)(4), the Division of Corporation Finance has determined not to publicly disclose it. Accordingly, excluded information from the following exhibits will not be released to the public for the time periods specified:

    Exhibit 10.10

    Exhibit 10.13

    Exhibit 10.15

    through December 31, 2015

    For the Commission, by the Division of Corporation Finance, pursuant to delegated authority:

    Daniel Morris Special Counsel

    What confidential financial information is SunPower not disclosing to the public? Could it be the hundreds of rooftop installations under their Power Purchase Agreements?

    Beware SunPower SHORT SELLERS. SunPower is the world leader in solar panel efficiency, therefore, it can produce more power in less space. Because of this, SunPower is using Power Purchase Agreements to capture the worldwide commercial rooftop solar power marketplace. It works like this, SunPower installs solar equipment on the roofs of commercial buildings for FREE. In return the owners of the buildings agree to buy the power output from SunPower at a fixed rate for the next 10 years. In return, SunPower gets to use the roof space lease free. It’s a win/win situation for both sides. Stores in California and beyond are getting great fixed rates for electrical power under these Power Purchase Agreements. Hundreds of stores like MACY’s, Staples, Kohl’s and Whole Foods are all operating under this new commercial roofing standard. This also changes the way SunPower reports quarterly results, because these Power Purchase Agreements are accounted for over multiple years. Many of these projects are now being sold off by SunPower to other investors and power companies worldwide. When that happens, millions of dollars will come back to SunPower. Could this be the reason for the past poor FCF?

    Tom Werner, SunPower CEO recently said construction and ramp of manufacturing in Fab 3 will continue through 2013 and, when complete, will generate more than 1,400 megawatts per year of 22% high-efficiency solar cells.

    Aug. 30 /PRNewswire-FirstCall/ -- SunPower Corp. (Nasdaq: SPWRA, SPWRB) today announced that SunPower world-leading solar technology has been selected for installation at several U.S. government properties, including for the Department of Energy's National Renewable Energy Lab (NREL), the General Services Administration (GSA), the Navy and the Air Force. SunPower expects to create more than 1000 local jobs during the construction of these projects. These contracts represent a minimum of 20 megawatts (MW) of new solar projects for SunPower.

    Sept. 22 /PRNewswire/ -- SunPower Corp. (Nasdaq: SPWRA, SPWRB) today announced that the company has been selected to design, build, operate, and maintain the 10-megawatt Dover SUN Park, in Dover, Del. for White Oak Solar Energy, L.P., a wholly owned subsidiary of LS Power Group.

    GENEVA, Oct. 4 /PRNewswire-FirstCall/ -- SunPower Corp. (Nasdaq: SPWRA, SPWRB) today announced that Etrion Corporation (TSX:ETX.to - News), an independent solar power producer, has completed the previously announced definitive sale and purchase agreements to acquire the equity in the first two phases of Montalto di Castro solar park, Italy's largest solar photovoltaic (PV) power park, for approximately euro 49 million. "With the closing of this acquisition, we are well on our way to completing the monetization of 85 MWs in Italy this year," said SunPower CFO Dennis Arriola. "SunPower's world-leading technology and proven performance of more than 225 MWs of operational power plants in Europe has provided us with a strong set of potential financing partners, including many new participants to the solar market." Montalto di Castro will be Italy’s largest operating photovoltaic park with 85 megawatts in capacity. The projects, expected to be the largest in Europe, highlight the attractiveness of Italy’s solar market.

    Oct. 12 /PRNewswire/ -- SunPower Corp. (Nasdaq: SPWRA, SPWRB) today announced that construction is underway on a 3.5-megawatt SunPower solar power system at Macy's, Inc. online fulfillment center in Goodyear, Ariz. The system will deliver the equivalent of 70 percent of the 600,000-square-foot building's electricity demand, and is expected to be the largest solar system on a single rooftop in the U.S. when it is completed in March of 2011. Upon completion of the solar power system in Goodyear, Macy's will have more than 12 megawatts of SunPower systems installed at its facilities.

    Oct. 20 NEW YORK (MarketWatch) -- Constellation Energy Group (CEG) said Wednesday it reached an agreement to build its largest solar energy array in New Jersey, a 5.2 megawatt facility at the Johnson Matthey plant in West Deptford, N.J. The price of the project was not disclosed. Solar panel maker SunPower will design and build the 21-acre power generation site, which will produce the equivalent amount of electricity needed for 718 homes. Constellation Energy will own, operate and maintain the system, with Johnson Matthey.

  • Report this Comment On November 08, 2010, at 10:20 PM, TMFTortoise wrote:

    Hi jrmart,

    Yes, future earnings. But, until those earnings (and by extension, cash flow from operations) are enough to sustain the company and allow it to reinvest in its business (via capital expenditures and/or acquisitions) without constantly raising cash by issuing new shares (to the tune of $847 million over the past five fiscal years), I'm probably going to stay away.

    Net income total, past 5 fiscal years: $161.7 MM.

    Cash from operations, same period: $249.2 MM.

    Capex, same period: $798.7 MM.

    Acquisitions, same period: $116.9 MM, plus another $272.7 MM in the past six months. (all data from Capital IQ)

    Sure, it's investing in future earnings growth with all that capex and acquisitions, but how long will shareholders continue to be diluted by equity raises and when will those assets being built begin to really generate the net income (and cash) they were supposed to?

    Maybe the list of projects provided is the start of that. If so, fantastic. As for the power lease agreements and the monetization of same, we'll see when the money flows into the company. But given the history on the financial statements, I'm going to take a wait-and-see approach with SunPower.

    Thanks for reading.

    Cheers,

    Jim Mueller

  • Report this Comment On November 09, 2010, at 11:03 AM, jrmart wrote:

    Jim, it's good to get several opinions before you invest in any company.

    SunPower's first BIG Power Purchase Agreement was completed on Oct. 4, 2010.

    GENEVA, Oct. 4 /PRNewswire-FirstCall/ -- SunPower Corp. (Nasdaq: SPWRA, SPWRB) today announced that Etrion Corporation (TSX:ETX.to - News), an independent solar power producer, has completed the previously announced definitive sale and purchase agreements to acquire the equity in the first two phases of Montalto di Castro solar park, Italy's largest solar photovoltaic (PV) power park, for approximately euro 49 million. "With the closing of this acquisition, we are well on our way to completing the monetization of 85 MWs in Italy this year," said SunPower CFO Dennis Arriola.

    That's why SunPower is forecasting a 69% shortfall for the 3rd quarter and forecasting a 132% increase in the 4th quarter.

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