Recently, I highlighted how valuing solar stocks is almost a futile effort given the fast changing nature of the industry. One company that exemplifies that is SunPower (SPWR +0.00%) given the diversity and complexity of its business.
SunPower does everything from selling solar panels to building massive solar projects to financing small rooftop solar systems. Sometimes it sells these systems and sometimes it keeps them on the balance sheet, hiding the value from unknowing investors.
Despite that complexity, I'll try to lay out a model of what SunPower may be worth today and why I think it's greatly undervalued.
SunPower's headquarters, covered in high-efficiency solar panels. Image source: SunPower.
A change in business model
One of the key things to understand about SunPower is that there is more than meets the eye on the income statement. Management is now building a significant number of projects -- from small residential to large utility scale -- on the balance sheet, including 100 megawatts last quarter alone.
A SunPower utility project being cleaned by an automatic panel cleaner. Image source: SunPower.
At the end of last quarter, the company had 605 megawatts of projects under contract, most of which had already been built. To gauge the value of these projects if they were sold or dropped down to a yieldco, we can compare to SunEdison's yieldco TerraForm Power, which has 807.9 megawatts of solar projects and a $2.92 billion market cap for $3.61 per watt in value. Using that as our proxy, SunPower has at least $2.19 billion of projects on its balance sheet and arguably much more given the higher long-term performance of SunPower's solar panels than SunEdison's.
This is just the existing value of these projects, not the future value of projects built or solar panels sold. So, we need to consider that as well.
SunPower's ongoing solar business
The projects I outlined above are not all complete, but for simplicity's sake let's assume they are and now we need to value the ongoing business. SunPower does a combination of building projects and selling panels and each of those generates a different amount of value.
Over the last year or two the solar industry has adopted the concept of retained value for projects companies keep on the balance sheet. Retained value is the projected future cash flows of a project discounted down to the present day. In theory, this is what a company should be worth if it shut its doors today and just fulfilled contractual obligations. But keep in mind that there are operating costs like sales and overhead that go into obtaining and building projects, so this value is given pre-operating costs.
In SunPower's case, I think a good measure of value each year is the retained value the company adds to the balance sheet plus gross profit minus operating expenses. The formula looks like this, and it's somewhat approximate to the concept of EBIT, which is a commonly used financial concept.
Added Retained Value + Gross Profit - Operating Expenses = Value Added (EBIT Proxy)
SunPower doesn't give explicit retained value or retained value per watt data but based on conversations with management, I've made conservative estimates below. I've approximated that 500 megawatts of capacity is used to build projects on the balance sheet and the rest is sold, for which I've used the gross margin per watt based on recent earnings. The figures below are on an annualized basis and will go into the formula above.
|
Megawatts |
Value per Watt |
Total Value | |
|---|---|---|---|
|
Residential |
100 MW |
$2.00 |
$200 million |
|
Commercial |
200 MW |
$2.00 |
$400 million |
|
Utility |
200 MW |
$1.50 |
$300 million |
|
Panel and Project Sales |
800 MW |
$0.50 |
$200 million |
|
Total |
1,300 MW |
$1.1 billion |
Author's own calculations.
To get the total value added annually we then need to subtract operating expenses, which are about $350 million annually.
In total, it looks like SunPower can generate about $750 million in value annually without any growth. Remember, this is a proxy for value creation using retained value -- a new concept in the industry -- and gross margin, so this isn't a traditional financial metric.
SunPower solar carport, one of the great growth markets in solar. Image source: SunPower.
With this calculation, the $2.19 billion of value already on the balance sheet, and SunPower's market cap of $4.33 billion, the ongoing operations are trading at just 2.9 times annual value creation. That's before considering any growth, which is estimated at around 20% annually, and uses conservative retained value and gross margin figures.
Just the capacity expansions we know about will bring capacity to over 1,800 megawatts by 2016 and likely higher. So, it's likely SunPower will be able to generate even more value than I've outlined above, especially if it launches its own yieldco.
SunPower has a lot to offer investors
The solar industry changes quickly but one thing SunPower has over competitors is a measurable technology lead and a global presence, which keeps them relevant through business model changes and no matter what market is hot at the moment. That position and the low valuation I've outlined above make this a steal of a stock in a high potential market.
As SunPower transitions to building more projects on its balance sheet and even launching its own yieldco I think the value I've outlined above will begin to be unlocked. This is a solar stock to keep your eyes on, and I think now is a good time to jump in.
