Can SunEdison Inc Overcome the Competition?

SunEdison (SUNEQ) is involved in the manufacturing of solar PV modules. The company also designs, installs, and finances PV systems for homeowners, businesses, and the utility sector. The Solar industry is a highly competitive industry but has high future growth prospects. The market is currently dominated by solar giants like First Solar (FSLR -9.26%), SunPower (SPWR 50.00%), and Yingli (NYSE: YGE). These major players compete on both technological superiority and price, making it extremely difficult for new players to establish themselves. This report is intended to analyze the industry's competitive positioning along with the financial position of SunEdison.

Revenue and EPS
In the 2013 fiscal year, SunEdison generated around $2 billion in revenues as compared to $2.5 billion generated in 2012. The reason behind this decline is a change in the mix of solar energy system sales and a change in company policy to retain more projects on the balance sheet.

Figure 1 Source: Capital market presentation 2014

The company projects that it will create value of $1.11/watt by 2016, as compared to the current $0.20/watt (shown in the diagram.) The strategy of keeping more projects on the balance sheet (charging rent instead of one-time sales) will keep both the top and bottom lines under pressure. See the graph below for revenue and EPS trends.

Figure 2 data from Yahoo Finance
2014 projections do not include the revenues obtained by leasing the projects.

As the table shows, the overall revenues for 2014 are not expected to cross $2 billion. The decrease in revenue, although justified, could impact the valuations of the company going forward if the information about retained MWs is not properly disseminated among investors.

Balance sheet position
The cash balance of the company is around $576 million, and the current ratio is around 1.26, while the industry average current ratio is above 3. Moreover, the company was unable to generate positive operating cash flow (OCF) in the previous three accounting periods. A lower-than-industry current ratio and inability to generate positive OCF are indicative of balance sheet weakness.

To add to this, the company is also changing its business model, which will result in lower upfront revenues. The company's debt-to-equity ratio is sky high at 1,368x, as compared to the industry average of just 25x. If the company is not able to generate positive cash flows soon, it will have severe liquidity problems. A weak balance sheet leads to more risk for investors, which is also reflected in a beta of 2.46 as compared to the industry average of 1.39 (indicating high share price volatility).

SunEdison is expected to complete 1.1 GW of energy systems in 2014, and it has also set itself a 2GW target for 2016. Moreover, the project pipeline is quite healthy and stands at 3GW compared to First Solar's 3GW. In contrast to the financial outlook, the operations look to be in a healthier state.

Competitive positioning
The solar competitive advantage lies in either reducing the cost of systems or improving the performance of modules. The efficiency space is very intensely contested by players like First Solar, SunPower, and some Chinese manufacturers. The modular efficiency of SunEdison's Silvantis is lagging behind many other silicon module manufacturers:

SunEdison is targeting a 20% modular efficiency by 2016, but First Solar is already expected to make 18% CdTe Solar modules by 2016. Another major competitor, SunPower, has already announced that it has achieved 23% conversion efficiency.

The point is that SunPower is leading in terms of efficiency, while CdTe will be a very suitable alternative to 20% silicon modules because of its suitability for a variety of temperature conditions. Trina has already achieved 21% cell conversion efficiency, which translates to around 18% for a 72-cell module. This means that the competitive position of SunEdison can be questioned unless it demonstrates a clear competitive advantage over its counterparts.

Bottom line
The solar industry has future growth potential, and growth opportunities always entail tough competition. The competition in the solar industry is very stiff thanks to companies like First Solar and SunPower.

SunEdison has its strengths and weaknesses. It has a strong project pipeline, and its annual MW completion rate is also pretty healthy. On the other hand, the company's balance sheet position is unsatisfactory, and it may face liquidity problems in the future. The company's competitive position is also not very impressive with the market dominated by superior SunPower and First Solar products.

Potential investors should keep a close eye on the company's cash flows and liquidity before initiating any positions.