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Is the Sun Rising or Setting for SunPower?

By Travis Hoium - Feb 8, 2018 at 6:34AM

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President Trump's solar panel tariffs will hurt the company, but there are also some bright signs ahead.

SunPower Corp. (SPWR -0.74%) has been through a lot in the past year, from a major strategy shift to solar tariffs being slapped on all of its U.S. imports. Amid the chaos, the company has slowly improved its core residential and commercial solar businesses, and recently sold its stake in yieldco 8point3 Energy Partners (CAFD)

As investors consider what's next for this solar energy stock, here's a look at how both the 8point3 Energy Partners sale and the tariffs could impact the company. 

A SunPower installation with a cleaning robot washing panels.

Image source: SunPower.

Cashing in on 8point3 Energy Partners

One of the biggest risks for SunPower has been its highly leveraged balance sheet, which is a particular problem now that it's reporting losses. But the $350 million or so in proceeds it will reap from the 8point3 Energy Partners sale should help the balance sheet. 

Below I've outlined what the debt side of the balance sheet may look like after the sale closes. I've eliminated the 2018 debt due in June and also subtracted the $176.9 million of debt from the El Pelicano facility that was sold earlier this year. 

Debt Type
As of Q3 2017 Projected Pro Forma
Convertible debt due 2018 $300 million $0
Convertible debt due 2021 $400 million $400 million
Convertible debt due 2023 $425 million $425 million
Non-recourse debt $637.8 million $460.9 million
Other loans $30 million $30 million
Total $1.79 billion $1.32 billion

Source: SunPower SEC Filings. 

The company will likely have around $1.32 billion of debt by midyear, still a high level, but the next convertible debt tranche is due in 2021, and most of the remaining debt is backed by solar projects and is non-recourse to SunPower. 

If operations turn around and SunPower starts generating a significant operating profit, that debt won't be a problem. But that's where the picture gets a little less clear. 

Where does SunPower sit after solar tariffs? 

One of the reasons SunPower's stock hasn't recovered the last few quarters is that fears of solar tariffs have been hanging over the company -- and President Trump made those tariffs a reality. Unless it gets an exemption from the administration, SunPower will have to pay a 30% tariff on its imported panels, just like everyone else. 

The problem for SunPower is that its solar panels are already more expensive than those of most rival manufacturers, so it will be hit with even stiffer tariffs. Below I've put together a table showing SunPower's potential position in the industry after tariffs. In this example, I've assumed a commodity solar panel is $0.35 per watt, a SunPower panel is $0.60 per watt, the balance of system (BOS) costs are the same per watt no matter the system, and total tax benefits are 40% of the installation cost. 

Item Commodity SunPower Post-Tariff Commodity Post-Tariff SunPower
Solar Panel $0.35 $0.60 $0.46 $0.78
BOS $2.65 $2.65 $2.65 $2.65
Total Cost $3.00 $3.25 $3.11 $3.43
Tax Benefits (40%) $1.20 $1.30 $1.24 $1.37
Net Cost $1.80 $1.95 $1.86 $2.06

Table by the author based on industry data. 

You can see that SunPower's cost disadvantage grows from $0.15 to $0.20 in this scenario; the company is definitely going to be hit harder by tariffs than competitors.

One factor that may marginally reduce the impact on SunPower is that it has a pilot plant in Silicon Valley that's producing solar panels. Being U.S. made, those will be tariff-free, but that plant will provide less than 5% of total demand for the year. 

We also don't know yet how customers will react. The tariffs are pushing costs for solar power systems upward across the board, but SunPower was already charging a premium. It's possible that it will be able to balance out some of the tariffs by lowering its prices slightly. 

To put prices and margins into perspective, SunPower reported total residential revenue per watt (which includes inverters, racking, and other components) of $2.17 in Q3 2017 and a gross margin of 21.5%. If it simply absorbed my projected higher net cost of $0.11 per watt, its margins would fall to 16.4%. That wouldn't be a good number, but it wouldn't be the end of the world either. 

Where does SunPower go from here? 

When the company reports earnings next week, we'll get a better picture of how management views U.S. solar under a tariff regime. We know it's won at least 505 MW of tenders in France, over one-third of a year's worth of production, and its sales are growing in countries like China as well. We'll have to wait and whether the U.S. market is going to dry up, or if margins will shrink because of tariffs. 

What may be even more important to investors is how its power plant business is doing. Gross margins in power plants have been in the single digits for the past year, and SunPower has decided to shift to selling more components like panels, trackers, and inverters to third-party developers. The new strategy, along with 1.2 GW of panel capacity in China, could lead to strong margin growth in power plants; a gross margin in the mid-teens would be welcome news for investors. But there's no evidence yet that revenue or margin is being contracted for 2018 or beyond. 

SunPower's stock has fallen so far that it's tough to give up on at this price. But the company will have a lot of questions to answer when earnings come out. At least for now, though, we know the debt's it has coming due in 2018 probably won't be a problem. 

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