One of the challenges with solar companies today is valuing aspects of a business that can change dramatically from quarter to quarter. SunPower (SPWR +0.00%) is a key example of this because while it's easy to predict how many solar panels it's going to make in any quarter, it could do everything from sell those panels to an installer to build a project on its balance sheet. The amount of revenue, net income, and total value created depending on the strategy can vary widely.
SolarCity (SCTY +0.00%) has addressed this problem by publishing what it calls retained value. This is the present value of all future cash flows from contracted projects, discounted into today's dollars at a 6% discount rate. At the end of 2013, SolarCity said it had $1.05 billion in retained value, so if the company's assumptions are correct, it could close down its operations and still generate that much value over 20-plus years.
SunPower chooses not to disclose the same numbers, in part because management feels that SolarCity's assumptions are aggressive. But it does hold assets on its balance sheet just like SolarCity does so there's value that's not shown in the $1.88 in non-GAAP earnings delivered over the past year. As its HoldCo/YieldCo strategy unfolds, even more assets will be held on the balance sheet, further complicating valuation.
In an effort to estimate what SunPower is worth, I've run through some scenarios to help investors understand the company's underlying value.
SunPower's headquarters are lined with high-efficiency solar panels. Source: SunPower.
What is the true value of SunPower?
In the most recent quarter, SunPower reported that it has 172 MW of residential, 81 MW of commercial, and 264 MW of utility projects under contract. Based on conversations with management, I've estimated that essentially all of the residential and commercial projects are already built and the utility projects primarily consist of the Quinto and Henrietta projects, which will be built this year and next.
Massive projects like Solar Star seen here are adding more value to shareholders than just selling panels. Source: SunPower.
Management said on the conference call that the utility scale projects will generate in excess of $2 per watt in value when sold to a YieldCo and my research indicates that residential and commercial retained value is between $2 and $3 per watt.
If we just assume $2 per watt for all 517 MW, we can assume that SunPower has about $1.03 billion of value on its balance sheet or under construction.
One way to add up the value of the company is to take the earnings over the past year times a multiple and add in the value on the balance sheet. If we use non-GAAP earnings of $343.9 million times a multiple of 20 and add in $1.03 billion of balance sheet value we get a total value of $6.88 billion, or $42.87 per share based on the diluted share count.
Keep in mind that the multiple is the only thing accounting for increasing production, increased value from owning projects until completion, and growing installations from products like C7. Therefore, I think this is a reasonable approximation of value but probably still conservative.
SunPower is also growing into new markets like electric vehicles. Source: SunPower.
An alternative way to value SunPower
Another way to look at value is to assume a value for each MW deployed. For example, if SunPower used every panel it makes to build projects at $2 per watt, which I referenced above, it would generate more value than it does by selling panels to other installers.
The company gave a guidance range for MW through 2016 and that guidance indicates that a growing percentage of panels will go to these projects long term, so it's reasonable to account for that.
Putting a value on SunPower per watt deployed requires some broad assumptions, but I think it's a good way to get a feel for how it can generate value and works well comparing the company to SolarCity, who uses a similar model.
In the table below, I've assumed that SunPower deploys the high end of its guidance over the next three years and then calculated the annual value added assuming that the company generates either $1 or $2 of value per watt. The first column is split 50/50 between the two values per watt and the second column assumes everything is built with $2 per watt. This would be the absolute high end of the value SunPower could possibly create.
|
MW Deployed |
Value Added Assuming $1 per Watt |
Value Added Assuming 50% at $1/Watt, 50% at $2/Watt |
Value Added Assuming $2 per Watt | |
|---|---|---|---|---|
|
2014 |
1,400 |
$1.4 billion |
$2.1 billion |
$2.8 billion |
|
2015 |
1,600 |
$1.6 billion |
$2.4 billion |
$3.2 billion |
|
2016 |
2,000 |
$2.0 billion |
$3.0 billion |
$4.0 billion |
Source: SunPower and author's calculations.
This value would be analogous to a retained value or EBITDA value so it doesn't pull out operating costs. If we put a multiple on the annual values, we can get an approximation of SunPower's total value. If we use a multiple of six, we get a value of between $8.4 billion and $24 billion on the high end in 2016. That's a $52.37 share price at the low end and $149.63 per share on the high end.
So, does this pass the smell test? Last year, SunPower generated $511.4 million in non-GAAP gross margin on 1,035 MW recognized, or $0.49 per watt. Considering the fact that more panels will go to projects being built and completed on the balance sheet at a higher value in the future, I think the $1-per-watt figure is a good low end to the long-term value range; $2 per watt is high but I used it to explain the high end of a possible value add range.
C7 concentrates the sun's light six times on SunPower cells, allowing large projects to be built with fewer cells, leveraging existing capacity. Source: SunPower.
When compared to SolarCity, the numbers look even more reasonable. It expects to install 475 MW-525 MW this year and generated $1.90 per watt on leases last quarter. At the middle of the range, that's a possible $950 million in value added this year, which assumes that all installations are leases (which they aren't).
Now if we look at SolarCity's $5 billion valuation, or 5.3 times the high end of this year's retained value, I think the multiple range I've given above is reasonable.
SunPower is cheaper than it looks
All of these calculations are just trying to approximate what SunPower is worth because its value is complicated by keeping projects in its balance sheet. Long term, this is the right thing to do to increase shareholder value but hides value that will be unlocked in the future.
With shares trading at 18 times trailing earnings even with this value hidden on the balance sheet, I think there's incredible upside for the company. Value per watt is increasing and production will nearly double over the next three years.
This is a great buy in solar, particularly if you can hold on long enough to see this value be uncovered as the HoldCo/YieldCo strategy plays out.
