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SunPower Continues to Set Foundation for Growth

By Travis Hoium – Feb 13, 2014 at 3:00PM

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Slow and steady progress continued at SunPower in the fourth quarter.

The solar market continues to grow at a rapid pace and the result is higher demand and margins for the industry's leading companies. SunPower (SPWR 0.54%) was the first in the industry to report earnings last night and revenue came in at $638.1 million and net income was $22.3 million, or $0.15 per share.

Like First Solar (FSLR 1.16%), SunPower gets a lot of its revenue from utility scale projects, which is very volatile quarter to quarter so it's often more important to look at non-GAAP results that adjust for project timing. On that basis, revenue was $758.2 million and net income was $72.2 million, or $0.47 per share.

Not only can projects impact timing revenue but residential or commercial leases can make it tough to take a lot just from the revenue number quarter to quarter. What's more important is that gross margins were 20.4%, around what we can expect from solar companies that are leading the industry.

From a growth perspective, SunPower is in something of a holding mode until its 350 MW expansion is completed in early 2015. Management said that two-thirds of the capacity there would be a new product that will be 23% efficient, another step ahead of competition that makes panels that are 15% to 17% efficient. Long term, this is SunPower's strategy for winning in solar because more efficient modules produce more energy whether they're on a rooftop or in a utility scale installation.

The 350 MW expansion in capacity is the only expansion we know of for sure today, but management also alluded to the next phase of expansion in 2016 or 2017. When discussing their fifth fabrication facility, or Fab 5, CEO Tom Werner said the next facility will be a "much larger scale." I think that will mean in excess of 1 GW, but we won't know more until at later on this year when I'd expect the expansion to be announced.

Residential solar is growing but there's a catch
What investors may be looking for today is progress in residential solar, where SunPower is trying to keep pace with SolarCity's (SCTY.DL) leadership. In the fourth quarter, SunPower installed 13 MW of residential projects and booked just 7 MW, which is well lower than the 60 MW SolarCity installed in the third quarter.

What's important to understand in the residential market is that there's cash, lease, and loan sales and with lease capacity constrained near the end of the year SunPower pushed customers to cash and loan sales. A $220 million lease equity facility announced recently will ease pressure on leases in 2014, so that business should grow.

Overall, SunPower installed 48 MW of residential solar, which would likely make it the second-largest installer in the country. So, when comparing to SolarCity, we won't see as many installations in the quarter and long term may not even keep pace with SolarCity. But residential solar is still a huge business for SunPower and it is expected to grow 50% or more in 2014 as the company steps up marketing efforts nationwide.

Foolish bottom line
SunPower continues to sell every panel it can make and is making solid margins in utility, commercial, and residential markets. This is a diverse way to play the solar market and is not only positioned well strategically but it also has one of the best balance sheets in the industry. Look for growth in residential solar, which SolarCity dominates, in 2014 and potentially more integration in that business in the near future.

Travis Hoium manages an account that owned shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool recommends and owns shares of SolarCity. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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