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...
By now you've probably heard the bad news that the Trump administration is imposing tariffs on imported solar panels this year. But have you heard that one company is going to be immune to those tariffs?
SunPower ( SPWR -9.11% ) really wants you to know about that, and yesterday told Reuters -- a day before the official announcement was made -- that its appeal to the U.S. Trade Representative to be exempted from 30% tariffs on imported solar panels has been granted.
Partly because SunPower's solar cells and modules are made in Mexico and the Philippines (rather than China, the focus of President Trump's trade war), and partly because they're "highly differentiated IBC cells and modules" rather than "cheap, commoditized imports" (and thus less likely to undercut U.S.-made solar panels on price), SunPower solar products will be permitted to sidestep tariffs that began this year, and will continue to add cost to competitors' products through at least 2021.
Let the upgrades commence
Hearing this, investors rushed to bid up SunPower stock 15% yesterday, and the buying is continuing today as Wall Street keys into the news -- and begins rewarding SunPower with upgrades and target-price hikes.
Here's what we're hearing so far:
From R.W. Baird: The investment banker is calling SunPower stock a "fresh pick," noting that the exemption from tariffs that burden its rivals will help SunPower "to better compete in the U.S. market while capturing higher margins" on its sales. Baird today raised its price target on SunPower to $9, but left its official rating at neutral.
From Credit Suisse: The Swiss megabanker went Baird one better -- not just raising its price target (to $10 a share) but actually upgrading SunPower to outperform. Credit Suisse cautions investors not to expect an immediate boom in SunPower's profits, noting there's no indication that the company's exemption from tariffs will be retroactive to include tariffs already imposed this year. That being said, tariff exemption in 2019 and 2020 could add as much as $35 million to $40 million per year to the company's gross profits.
From JPMorgan: Saying it's "warming to" SunPower stock, America's biggest banker joined Baird in raising its price target to $9 a share. TheFly.com reports that JP believes exemption from Section 201 tariffs "eliminates an overhang for the stock and provides the company a competitive advantage over international competitors."
The analyst also noted that SunPower explicitly included the effects of Section 201 tariffs on its earnings when giving guidance back in Q2. If tariffs won't, in fact, hit SunPower's earnings, then that creates potential upside in the company's guidance.
A few words on guidance
How much upside, and how will it affect guidance? SunPower said in July it was expecting to earn adjusted EBITDA of $95 million to $125 million this year, with tariffs weighing down those results. Now, JPMorgan sees "upside" to these numbers. Credit Suisse, however, said it did not expect much upside this year, given that 2018 is already three-quarters over, and tariff relief is probably not retroactive to reimburse SunPower for the past nine months of tariff-depressed sales.
As a result, we're probably still looking at something on the order of the "$55 million negative impact related to tariffs" that SunPower told us to expect back in May 2018.
As for future effects of tariff relief, Credit Suisse says it thinks earnings could be boosted by $35 million to $40 million over the next two years. Why not by the full $55 million in tariff effects that SunPower cited? The reason is because, as my fellow Fool.com contributor Travis Hoium explained earlier this year, tariffs are planned to trail off over time. Although they're adding 30% to imported solar panels' cost this year, the tariff will shrink to 25% in 2019, then 20% in 2020, and 15% in 2021.
Why I'm not buying Wall Street's buy thesis -- and why I'm not buying SunPower stock
Thus, the farther you go out in time, the less important this tariff relief actually looks for SunPower. In fact, given that the biggest tariff year has already mostly run its course, it's kind of surprising that investors are reacting so strongly to SunPower winning tariff relief on the later years, when the tariff burden will be smaller.
Meanwhile, by its own admission, SunPower is still expecting to lose of $830 million to $860 million, net, this year. That's on top of losses of $850 million last year, $470 million the year before that, and nearly $190 million the year before that. Losses are growing at SunPower, and even an additional $35 million or $40 million -- or even $55 million -- in gross profits is not going to change that fact.
Tariffs or no tariffs, I still don't see a good argument for buying SunPower stock.