As SunPower Corporation (SPWR +0.00%) moves forward with its application for a tariff exclusion on interdigitated back contact (IBC) solar imports, investors should keep in mind the impact of such a decision. SunPower's solar panels are more expensive than those of most competitors; as a result, it's paying a higher tariff in the U.S., putting it at a disadvantage in this market.
SunPower's tariff may be only 4 or 5 cents per watt higher than it is for competitors, but when you're talking about hundreds of megawatts of solar imports, the impact of those tariffs is tens of millions of dollars. And a full exemption could mean up to $100 million of upside for SunPower in 2018 alone. Here's what we know so far.
Image source: SunPower.
A tariff exclusion would be huge for SunPower
During the fourth-quarter 2018 conference call, an analyst asked what the impact on SunPower's financials would be if the so-called 201 exclusion, which refers to the section of the Trade Act of 1974 that offers tariff relief under certain instances, was granted. Here's what CEO Tom Werner said:
"I think just to scale the impact of 201 for 2018, it depends on mix, of course, and the safe harbor material and all those sorts of things, but the impact on EBITDA is between $50 million and $100 million."
Since the financial benefit of the tariff exclusion would be felt on the cost side of the equation, not revenue, the projected increase in EBITDA would be almost entirely incremental to the bottom line. And after generating only $189.7 million in adjusted EBITDA in 2017 and projecting just "positive" EBITDA in 2018, the windfall would be extremely helpful to the company.
Where an exclusion would impact SunPower
The IBC products SunPower is seeking an exclusion on are almost exclusively used in residential and commercial solar markets. These are also the company's most productive markets long term.
I would expect SunPower to use a tariff exclusion to aggressively expand its pipeline of residential and commercial projects, potentially pairing solar systems with even more energy storage to generate incremental revenue. And an exclusion would give four years of imports excluded from tariffs, so any windfall would be long-lasting and potentially even larger in 2019.
Investing in the future
A windfall of as much as $100 million would give SunPower a lot of flexibility in the future. It could bolster the balance sheet with additional cash, which may be attractive after financial hardship hit the last few years.
But it could also invest in expanding solar panel production. IBC upgrades are already taking place at its Fab 3 facility in Malaysia, and we could see those accelerated -- or even a factory expansion -- if an exclusion goes through. I also wouldn't be shocked if SunPower sees growing its P-Series solar panel production in Mexico or another market as an attractive option if the funds free up. P-Series capacity takes only about six months to get up and running -- and with high-efficiency solar cells expected to be oversupplied by late 2018, this may be an opportunity to take advantage of the market.
A limited capacity to take advantage of any exclusion
I'll note that SunPower won't be able to increase capacity very quickly to take advantage of any exclusion. The tariff exclusion would apply only to IBC solar panels, or E-Series and X-Series, which take a long time to add capacity. The P-Series product that uses commodity solar cells and is geared toward the power plant market won't likely be included in any exclusion.
Nevertheless, a tariff exclusion for IBC solar panels would be huge for SunPower and its investors. I don't know how positively the stock would react, but given the potential $100 million windfall in 2018 and SunPower's market cap of about $1 billion, there's upside for SunPower if it does get relief from solar tariffs.
