On September 18, 2018, the Trump administration announced a tariff exemption for SunPower Corporation's (NASDAQ:SPWR) high-efficiency solar panels, currently being produced in Asia. The exemption will allow the company to bring panels used for high-value rooftop solar into the U.S. tariff-free, making them more competitive with primarily Asian-made commodity solar panels. The amazing news is that the exemption should save SunPower about $100 million in tariff costs over the next year

You might think the market would respond positively to news like that, but instead, SunPower's stock has dropped 14.7% since the announcement. Sometimes the market does wild things, and what I think it's missing is that newly lowered costs and strong demand have SunPower set up to crush expectations in the second half of the year. 

Parking lot with solar carports.

Image source: SunPower.

2018 is shaping up to be a good year

SunPower has had a strong year in residential and commercial solar, where its high-efficiency products resonate well with customers. Residential solar gross margin in the third quarter was an impressive 21.8%, and that should improve as new products are rolled out. Plus management raised the bottom of EBITDA guidance by $20 million to $95 million to $125 million on strong residential and commercial results, even before the exemption was announced. 

Going into the third quarter, management set guidance at breakeven, plus or minus $10 million, on an EBITDA basis on $425 million to $475 million in revenue. But all of these guidance figures are from before the tariff exclusion took effect. 

SunPower should get a small benefit of at least a few million dollars from the tariff savings in the third quarter, but we will likely see a big benefit of around $25 million straight to the bottom line in the fourth quarter. But the market doesn't seem to realize there will be a benefit yet. 

Analysts are behind the curve

Incredibly, analyst estimates haven't improved materially in the last 60 days for SunPower's third and fourth quarters. Earnings expectations are for a loss of $0.40 per share in the third quarter, up marginally from an expected $0.43 loss 60 days ago. In the fourth quarter, a $0.14 per share loss is expected, flat with expectations two months ago. 

The simple fact that estimates haven't changed much since the exemption went into place and that tells me that investors aren't factoring in the tariff exemption yet. SunPower has traditionally set a low bar for guidance as well, so it may have set itself up to easily surpass guidance now that it does have an exemption. 

The wild card

If there's one thing that might upend SunPower's chances to beat expectations, it's ongoing asset sales and writedowns to clean up the balance sheet. In the fourth quarter of 2017, SunPower wrote down $604.4 million of residential solar assets that it's planning to sell, and last quarter there was a $369.2 million writedown of manufacturing assets. These can be large costs that investors aren't expecting in a quarter. 

While impairments may happen this quarter, I think the overriding storyline heading into earnings should be the tariff exemption. That alone should improve margins and potentially allow SunPower to beat guidance for the third quarter and the full year. Investors and analysts don't seem to have that upside priced into the stock. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.