Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
A funny thing happened to shares of Vivint Solar (NYSE:VSLR) stock this morning: Nothing.
When a stock reports earnings -- whether good, bad, or indifferent -- you ordinarily expect the stock to react in some way after earnings. But Vivint Solar is not reacting at all after yesterday's report of having earned $0.15 per share on sales of $81 million. Vivint Solar stock cost $5.55 before earnings, and it still costs precisely $5.55 (at least, it does as of this writing -- at 12:55 p.m. EDT).
What Vivint said
In fact, investors' non-reaction to Vivint's earnings today is weird for a couple of reasons.
First, because Vivint's numbers were a whole lot better than Wall Street had expected it to report. According to Yahoo! Finance, analysts on Wall Street on average expected Vivint to report earnings per share of $0.09 for its fiscal second quarter 2018. In fact, the $0.15 that Vivint actually reported was 66% ahead of consensus -- a result that you'd ordinarily expect to send the shares flying.
These earnings were also nearly four times the $0.04 per share that Vivint had reported in Q2 2017, so they represented very substantial growth, and a significant improvement in profitability on the company's sales, which grew only 11%.
Upgrading Vivint Solar
The second reason that it's surprising to see so little reaction from investors is that, after reporting earnings, Vivint quickly garnered an upgrade from analysts at JMP Securities.
This morning, JMP upgraded Vivint shares from market perform to market outperform. What's more, according to a write-up on StreetInsider.com, the analyst has assigned Vivint an $11 price target.
And as the analyst explains, the reason for the likely price appreciation in Vivint shares might have a lot to do with the reason investors are not yet reacting much to Vivint's earnings.
The trouble with cash -- or lack thereof
When Vivint reports its financial results, it tends to focus on two things: its earnings -- which, as we've already observed, were great -- and its "estimated retained value." The latter is a unique metric that Vivint uses to try to gauge the value of its business model, whereby the company installs solar panels for and leases solar panels to customers today in hopes of reaping years, or even decades of revenue tomorrow as it collects payment on the leases.
Now, JMP believes that "retained value is a reasonable measure of the economic value being created." The problem with this approach, however, is that many other companies in the solar business have tried similarly bespoke methods of accounting -- then gone bankrupt -- in recent years. Burned by this experience, investors are becoming leery of trusting solar companies' estimates of what their leases are worth. Instead of earnings and "estimated retained value," investors want to see that companies like Vivint can also generate actual cash flow to keep their businesses afloat.
In JMP's view, though, this is exactly what Vivint did last quarter. The company made "progress ... this past quarter on cash generation," and that progress may prove "important" to convincing investors that Vivint's other numbers are on the level. The more cash Vivint generates, therefore, the better the news should be for Vivint stock.
Running the numbers
So how did Vivint do on this metric? Curiously, not great -- certainly not great enough, in my view, to explain why JMP has suddenly decided to upgrade the stock.
According to the company's report, cash flow at Vivint Solar was negative $4.7 million in Q2 2018. That was an improvement from Q2 2017's negative cash flow of $16.8 million to be sure, but it's still not positive cash flow. Moreover, Vivint spent more on capital investment in this year's Q2 than in last year's Q2 -- $74 million -- with the result being that its free cash flow number of negative $78.7 million was really only slightly better than the $86.7 million in cash burnt one year ago.
The upshot for investors
Technically speaking, Vivint burned less cash last quarter than it did in the year-ago quarter, so JMP is right that things improved a bit. Still, unless and until Vivint generates real, sustainable positive free cash flow from its business -- something it hasn't managed to accomplish even once in the past five years, according to data from S&P Global Market Intelligence -- I really don't see how it can satisfy investors' skepticism about its quality of earnings.
And I don't see those investors' skepticism about Vivint stock going away anytime soon, no matter how many times Vivint beats earnings.