In this Industry Focus segment, Motley Fool analysts Sean O'Reilly and Taylor Muckerman explain why investors were so impressed by First Solar's report and why SunPower shares dropped 21% overnight on their earnings. Listen in to find out the most important numbers from both of the reports, some important announcements from management at both companies, whether this might be a buying opportunity for investors interested in SunPower, and more.
A full transcript follows the video.
This video was recorded on Aug. 3, 2017.
Sean O'Reilly: Earnings season is here, getting started, and already a few interesting stories coming out of the sector.
Taylor Muckerman: Oh, we're in the weeds, Sean.
O'Reilly: SunPower. Wow. This is A Tale of Two Cities. This is good stuff.
Muckerman: Sold off just a bit.
O'Reilly: SunPower shares fell by the biggest percentage drop in about a year, tumbling 21%. That was a good drop, thank you. You could do the sound effects for a little kids' cartoon.
Muckerman: I'm trying. Got to get that side hustle going, man.
O'Reilly: [laughs] The reason is the future. Management cut forecasts for the full year, saying they expect 2017 sales to fall in the range of $2.1 [billion] to $2.3 billion, instead of their earlier estimate of $2.6 billion. That's like 15%. This is not a minor drop.
Muckerman: Yeah, but it wasn't necessarily like this revenue disappeared.
O'Reilly: They'll get it later?
Muckerman: Yeah. There was a project, something like Arizona or Mexico. So they pushed it back to 2018. So it's still there. It's just not this year.
O'Reilly: That's a good disclaimer. The way I'm viewing this is, management said they expect panel shipments this year to total 1.3-1.4 gigawatts. I think Doc Brown whenever I --
Muckerman: Oh, you have to.
O'Reilly: Does he say "jigawatts"? We're going to YouTube this later. I think the more telling story is what happened over at First Solar.
Muckerman: Do tell. I didn't look into that.
O'Reilly: This is my insight here. Ironically enough, the other major U.S. solar module manufacturer -- say that five times fast --
Muckerman: I can't.
O'Reilly: -- First Solar couldn't have had a better earnings release, or a reaction to share price. Shares rose 10% on July 28 after the company reported $52 million in net income, or $0.64 per share. Analysts were expecting $0.04 per share.
Muckerman: Hot damn.
O'Reilly: Not bad. The quarter proved, in my opinion, that the company is in more than capable hands. First Solar was founded in the '90s, I believe, it was literally by a scientist who wanted to make solar panels. They got taken private by private equity. But bottom line, last year, they experienced their first loss in their entire corporate history. So they're a solar panel manufacturer, and last year was the first loss.
Muckerman: That's impressive.
O'Reilly: And it was self-inflicted, because they basically said, these panels are getting really efficient; we actually need to skip our Series 5 and jump from 4 to 6. They're retooling their entire factory outside of Toledo, Ohio. I am continually amazed by how effective the management is at running this thing.
Muckerman: Yeah. Most often, these upstarts are trying to scratch and claw their way out of the red.
O'Reilly: So you have that story over at First Solar, and then you see SunPower, which, admittedly, as you said, the revenue isn't disappearing; it'll show up later on. But to me, that's just, the market is like, First Solar is executing and SunPower is not.
Muckerman: Yeah, I think you could argue that point, for sure. And First Solar has, not a cloud, but the uncertainty of what they're going to do with their 8point3 Energy stake.
O'Reilly: Both of them own it.
Muckerman: First Solar is out. They sold out. And now SunPower says that they're willing to either sell their entire majority stake or sell the whole kit and kaboodle.
O'Reilly: I think everybody was uncertain what would happen with that stock, because it was like $12-$13 a few months ago. It's up in the mid-$14s now. And everybody is like, they have these 21 years worth of contracts on there with utilities, that they sell the solar power to. It'll probably turn out OK.
Muckerman: Yeah. And with that company, I think Sean introduced our listeners to them a couple months ago, the yieldco that these companies were selling --
O'Reilly: I think they have two employees. You know what I mean?
Muckerman: [laughs] They just have the buyer, the guy who flips the switch. So this was the yieldco that they were selling projects to to get cash. First Solar and SunPower were taking the cash, and then 8point3 was then running these businesses and generating revenue.
O'Reilly: And the reason you do that is, First Solar and SunPower are in the utility-scale business. These projects are $400 million, so picture how many solar panels you can get for $400 million.
Muckerman: I can't.
O'Reilly: Yeah. So the returns on invested capital are decent. They're 7%-10%. But it's not gangbusters. Coca-Cola's return on equity is 30%. So it's good, but it's not great. So you can make that money, if you're First Solar or SunPower, and just keep that on your balance sheet for 20 years. But who wants to do that? They would rather build the projects, get their assembly profit, drop it down, and get the $400 million back.
Muckerman: And then build another one.
O'Reilly: Right. The only hitch in that is, of course, raising capital.
Muckerman: Not always the easiest thing to do.
O'Reilly: Sometimes a problem, sometimes easy.
Muckerman: You run into some problems there, potentially, down the line. You look at SunPower freeing itself from that, potentially getting some cash out of that deal from its stake being bought out. And it has a decent balance sheet already. And it has Total, if something does hit the fan, as their big brother.
O'Reilly: Sixty-seven-percent owner. And, to SunPower's credit, they actually have crazy efficient solar cells.
Muckerman: Yeah, some of the best in the business.
O'Reilly: But First Solar's balance sheet is prettier. [laughs] Anyway, moving on from solar --
Muckerman: So a 21% drop in a day. It might be worth a look. Don't buy, but it might be --
O'Reilly: Do you think? Because of the solar panel efficiency?
Muckerman: Yeah, and the backing of Total. It's integrated. It makes its own and it installs its own. I think anytime you see a 21% drop in a company that's ...
O'Reilly: Working on things.
Muckerman: Yeah. It's worth a second look, especially in an industry that could be the future of energy.