When billionaire hedge fund manager David Einhorn talks, investors listen.
That's why his presentation touting SunEdison (OTC:SUNEQ) last week was so influential for that stock and others in the solar industry. If Einhorn is long, solar investors may be willing to take another look.
So what does David Einhorn see in SunEdison, and how can you make money if he's right?
SunEdison as a sum of the parts
What Einhorn argues is that SunEdison is worth far more than its current $18.50 stock price if you look at it as a um of its parts. Einhorn thinks the stock should be worth more like $32 per share based his valuation model. Here are the components he's looking at.
The most obvious of these components is a more than 60% stake in Terraform Power (NASDAQ:TERP), which is a public company that owns solar plants that SunEdison built. According to Einhorn this is worth $4-$5 per share (market value is actually around $6.50 today).
SunEdison is also the sponsor of Terraform Power and as a result it was given incentive distribution rights (IDRs) -- or a growing percentage of the distributions (dividends) given to shareholders in the future. You can think of it like a dividend that grows over time, except SunEdison takes more and more of the dividend as it grows. It's these rights that hold the most value according to Einhorn, who put a $9 per share value on the IDRs alone.
The most valuable business is SunEdison's core development business, which builds varying sizes of solar systems and sells them either to outside investors or to Terraform Power. Einhorn expects this core business to earn $1 per share this year and he thinks that puts its total value at $15-$16 per share.
Add in a couple of dollars for the value of the semiconductor business that was recently spun off and other assets and you get his $32 price target.
Is SunEdison really worth that much money?
It'll take years to determine what the IDRs are really worth, but I agree with Einhorn that the core development business is SunEdison's most valuable. There's almost limitless potential in building solar projects, and SunEdison has become a leader in that segment of the industry.
But here's where my questions come in. SunEdison has been reporting massive losses, in part because it's been writing down unproductive assets and in part because it's spending money building projects and keeping them on its balance sheet. These projects were used to build Terraform Power, so there's definitely value in doing that.
But that doesn't negate the fact that SunEdison is losing money while building something of unknown value that will show up sometime in the future. Wouldn't it be better to own a company that's making money now AND adding value for the future?
Two stocks that may be better than SunEdison
One of the reasons I like SunPower (NASDAQ:SPWR) more than SunEdison is that it's employing a similar strategy in building projects on its balance sheet, but it's also making money at the same time. You can see below that SunPower and utility scale project builder First Solar (NASDAQ:FSLR) have both become solidly profitable, while SunEdison is losing money.
At the same time, as SunPower has been reporting profits it has also built a 605 MW project pipeline of completed and under-construction projects on its balance sheet. This compares to 807.9 MW that's either built or under construction at Terraform Power. And SunPower's panels also have higher efficiency and lower degradation (as tested by third parties), so their projects should be worth significantly more on a per watt basis. Total project pipeline also favors SunPower at 8.0 GW to 4.3 GW as of the end of last quarter. Yet, SunPower has a $4.0 billion market cap while SunEdison has a $5.0 billion market cap.
The other company I think would be a better bet for investors than SunEdison is First Solar. As you can see above, First Solar is also profitable and has 3.2 GW in expected system and module sales to go along with 12.7 GW of pipeline. It doesn't play in the highly publicized residential market but it's one of the world's largest utility scale project builders and that's typically where the profits have been in the solar industry.
For investors, I think both SunPower and First Solar provide lower risk profiles and equal if not greater upsides. They both have differentiated solar panels rather than the commodity construction SunEdison either builds itself or buys from suppliers. Long-term, I think that really adds value for shareholders.
David Einhorn may be right that SunEdison is worth $32 per share, but I think there are better opportunities for investors with a long timeframe -- and SunPower and First Solar's profit and technological advantages should pay off in the end.