2024-01-05 04:50:38 ET
Summary
- SunPower provides photovoltaic services primarily to residential customers in the United States and Canada.
- They have been experiencing a slackening of demand since interest rates were elevated. This should alleviate as rates are reduced.
- New bookings improved significantly in September and October.
- They believe they will see cost improvements in 2024.
- I presently rate SPWR as a Hold.
Thesis
SunPower Corporation (SPWR) caught my attention because they spun off the manufacturing portion of their business and are now operating as installers. While I believe most panel manufacturers are going to be stuck with low margins due to commoditization and competition, installers interact with end-use customers, so the potential to provide value added products and service makes them more attractive.
The share price has dropped by about 44% since my article from September . I was hoping to gain exposure once the company became cheap enough. Because one of my degrees is in renewable energy, and I believe in the long-term prospects of solar as disruptors of our continuously supplied energy grid, I have been searching for potential investments to make in the industry. While I have confidence that the widespread adoption of photovoltaics will continue, finding companies which appear to have potential as long-term compounders has been difficult. I will continue regularly checking in on a variety of companies in the industry until I find one or more that are investible.
With rates elevated, I have been hoping some buying opportunities would present themselves within the industry. Unfortunately, most of the photovoltaics industry is not profitable enough, so I have found myself waiting. After looking over their financials and valuation, I presently rate SunPower as a Hold.
Company Background
SunPower provides photovoltaic services primarily to residential customers in the United States and Canada. They were founded in 1985 and became public in 2005. They spun off their manufacturing capability in 2020 under the name Maxeon Solar Technologies. They sold the industrial and commercial segments to Maxeon Solar Technologies in early 2022. SunPower is currently headquartered in San Jose California and is a subsidiary of TotalEnergies SE.
Industry-Wide Trends
The global solar panel market has a projected CAGR of 18% until 2030. The United States solar energy market is projected to have a CAGR of 16.48% until 2028. The Canadian solar panel market has a projected CAGR of 11% until 2028.
With photovoltaics currently the cheapest way to produce new sources of electricity, I expect for the industry to experience elevated demand until this changes.
Levelized Cost Of Electricity (Lazard, Dan Gearino, Insideclimatenews.org)
Guidance
Their most recent earnings call transcript can be found here . I encourage investors to go read it for themselves because I am only going to cover some of the highlights. I should also note that this earnings call took place on November 1st, before the Fed made their announcement that they were planning on lowering rates in 2024.
Just like the rest of the solar industry, higher rates have been crushing their demand. Although they found 18,800 new customers in Q3, they are still lowering their guidance for fiscal 2023 to 70K to 80K new customers and Adjusted EBITDA to -$35M to -$25M.
Guidance 1 (Q3 2023 Earnings Call Transcript)
The portion of their business that is driven by new home construction experienced a 26% increase in Q3 compared to Q2. Also, they still have a backlog of 38K new homes they expect to provide installs for.
Guidance 2 (Q3 2023 Earnings Call Transcript)
The retrofit portion of their business currently has a backlog of 18.1K customers. They expect to become more profitable in 2024 because both inventory costs and installation have been declining.
Guidance 3 (Q3 2023 Earnings Call Transcript)
They expect to deplete their inventory of SunVault V1 models in early 2024. They also cite that battery storage costs have been declining rapidly.
Guidance 4 (Q3 2023 Earnings Call Transcript)
The lease and loan portion of their business is now at 56%. This keeps them on track to eventually reach their long-term target of 65% to 75%.
Guidance 5 (Q3 2023 Earnings Call Transcript)
A significant amount of their demand came from California, Texas, Florida, and Colorado. They are hesitant to begin declaring this a turnaround, but both September and October saw booking increases.
Guidance 6 (Q3 2023 Earnings Call Transcript)
They expect their cash from operations to improve in 2024 due to a variety of factors.
Guidance 7 (Q3 2023 Earnings Call Transcript)
Overall, this earnings call tells a story of improving demand and future cost improvements laying out a clear path toward improving profitability.
Annual Financials
The company experienced a significant dip in revenue which found a bottom in 2020. Both 2021 and 2022 saw significant revenue increases over the prior year. They may be on a path which would have them achieve values for annual revenue similar to what they used to. In 2013 they had an annual revenue of $2,507.2M. By 2022 that had declined to $1,741.1M. This represents a total decline of 30.56% at an average annual rate of -3.40%.
SPWR Annual Revenue (By Author)
Their annual gross margins were contracting from their previous high in 2014 until 2017. In 2018 it reached a new high before retracting and falling into more stable range. As of the most recent annual report, gross margins were 20.90%, EBITDA margins were 1.98%, operating margins were -0.01%, and net margins were 3.22%.
SPWR Annual Revenue (By Author)
They have been diluting over the last decade. Total common shares outstanding was at 121.5M in 2013; by the end of 2022 that rose to 174.3M. This represents a 43.46% increase in share count, which comes out to an average annual rate of 4.83%. Over that same time period operating income fell from $109.5M to -$0.2M. With the share count rising while operating income fell, this dilution appears to not be accretive.
SPWR Annual Share count vs. Cash vs. Income (By Author)
Their long-term debt reached a high in 2015. They have been paying it down at a rather significant pace since then and paid off most of the last of it in fiscal 2022. As of the last annual report, they had -$18.4M in net interest expense, total debt was $559.2M, and long-term debt was $0.3M.
Their annual cash flow varies significantly from year to year. Their cash flow situation has been getting worse since 2020. As of this most recent annual report, cash and equivalents was $377M, operating income was $-0.2M, EBITDA was $34.4M, net income was $56M, unlevered free cash flow was -$29.3M, and levered free cash flow was -$42.8M.
SPWR Annual Cash Flow (By Author)
Their total equity found a low in 2018 and has been improving since then.
SPWR Annual Total Equity (By Author)
Their elevated margins in 2018 were contributing their outlier value for ROE in 2018. As of the most recent annual report ROIC was 4.93%, ROCE was -0.02%, and ROE was at 9.73%.
SPWR Annual Returns (By Author)
Quarterly Financials
They failed to file their Q2 results in a timely manner, so their cash flow statement and income statement for Q2 2023 were mostly blank. This is why so many of these quarterly charts have missing values.
Their quarterly financials are showing that revenue peaked in the beginning of 2023. I believe the primary cause for their revenue growth and subsequent decline was due to the average cost of electricity. As it rose, it helped drive demand for solar. When it stopped rising, the urgency it placed on consumers to adopt solar diminished. When this is combined with elevated rates, I was not at all surprised to revenues drop across the industry.
Average Cost Of Residential Electricity In The U.S. (Q3 2023 Earnings Call Presentation, Page 7)
Eight quarters ago SunPower had a quarterly revenue of $283.3M. Four quarters ago that had increased to $476.4M. By this most recent quarter it had decreased to $430.7M. This represents a total two-year rise of 52.03% at an average quarterly rate of 6.5%.
SPWR Quarterly Revenue (By Author)
Their quarterly gross margins for Q1 and Q3 are lower than the range they used to fall into. When I looked at their Q1 earnings call transcript, they cited bad weather causing installation delays.
Gross Margin Contraction (Q1 2023 Earnings Call Transcript)
When I looked at their Q2 earnings call transcript, they cited pricing and sales channel changes, a rise in inventory and installation costs, and lower volume.
Gross Margin Contraction (Q2 2023 Earnings Call Transcript)
Gross margins have only improved slightly since Q1. As of the most recent quarter gross margins were 16.83%, EBITDA margins were -3.37%, operating margins were -6.08%, and net margins were at -8.68%.
SPWR Quarterly Margin (By Author)
Their dilution rate appears to be slightly lower this last year than the year before. The sum of their last eight quarters of dilution comes to 1.38%; over the last four quarters this sum comes to 0.63%.
SPWR Quarterly Share Count vs. Cash vs. Income (By Author)
They paid down their long-term debt in Q1 of 2022, and again in both Q4 of 2023 and this most recent quarter. They appear to be paying off their long-term debt shortly after gaining it. This is a positive sign as it indicates they do not want to load themselves up on unsustainable amounts of debt and are likely to attempt to quickly pay down any future debt. The most recent quarter, SunPower had -$6.6M in net interest expense, total debt was at $363.5M, and long-term debt was at $0.3M.
SPWR Quarterly Debt (By Author)
Similar to their annual cash flows, their quarterly cash flows show significant variance from quarter to quarter. Their net capital expenditure is fairly stable.
SPWR Net Capital Expenditure (Seeking Alpha)
I believe a majority of the variance is due to fluctuations in their cash from operations, and that this is a result of changes in their accounts receivable, inventory, and accounts payable.
SPWR Cash From Operations (Seeking Alpha)
Their cash flow reached a low in Q1 and then made a high again this most recent quarter. As of the most recent earnings report, cash and equivalents were $104M, quarterly operating income was -$26M, EBITDA was -$14.5M, net income was -$37.4M, unlevered free cash flow was $59M, and levered free cash flow was $54.2M.
SPWR Quarterly Cash Flow (By Author)
Total equity rose into highs in late 2022 and early 2023, but have been slowly declining since then.
SPWR Quarterly Total Equity (By Author)
Similar to their cash flows, their returns vary significantly from quarter to quarter. As of the most recent earnings report ROIC was -4.75%, ROCE was -2.42%, and ROE was -8.83%.
SPWR Quarterly Returns (By Author)
Valuation
As of Jan 3rd, 2024, SunPower had a market capitalization of $855.76M and traded for $4.49 per share. They currently have a forward EV/Sales of 0.65x, a Price/Sales of 0.50x, a Price/Book of 2.13x, and a Price/Cash Flow of 55.12x.
When viewing Price/Cash Flow, I typically consider anything below 10x to be attractive. Considering their projected forward revenue growth of 8.03% and multiple unattractive profitability metrics, I view the company as presently overvalued.
SPWR Valuation (Seeking Alpha) SPWR Growth (Seeking Alpha) SPWR Profitability (Seeking Alpha)
Risks
The cyclicality of the solar industry is strongly affected by rates. A significant portion of new installs are funded through debt. With rates elevated, demand for photovoltaics has waned. The recent dot plot from the FOMC makes clear they expect to be able to lower rates to 4.6% by the end of 2024. While it is possible the soft landing narrative plays out as they expect, if inflation begins rising as rates lower, then the Fed will have to halt reductions or begin raising them again. This has the potential to crush demand even more than it already is.
Catalysts
If they were to improve their margins and profitability, their intrinsic value should rise. Returning to a story of revenue growth while recovering the margins they were producing when the average cost of electricity was rising would improve their apparent future value growth potential. If the cost of grid-supplied electricity were to begin rising again, it would be a boon for SunPower.
As rates are lowered, I expect that demand for solar will rise. Although the situation appears that it will improve, with rates expected to shift to 4.6% by the end of 2024, it is not likely to improve quickly. This should help drive demand for both new home construction, some of which will contain solar, and retrofits. I believe this has the potential to help to increase revenues industry-wide over the next several years. Solar companies may experience a glut of pent up demand as those who have been delaying installation become less incentivized to wait.
The addition of low cost storage to our electric grid will mitigate the problems caused by the duck curve. I believe that the continuing development and implementation of iron-air and other more cost effective battery designs will produce lasting tailwinds for the photovoltaic industry .
Conclusions
SunPower is currently suffering through a period of high interest rates causing a temporary slackening of demand. However, the fundamental factors surrounding their situation appear to be improving. The presently rather grim short-term situation must also be viewed in the context that the low levelized cost of photovoltaics is providing strong long-term tailwinds. Their present financial situation is unattractive enough that the recent increase in bookings is not enough for me to consider buying. While demand for their products and services should slowly return as interest rates drop, I would have to see them expand their gross margins and begin producing consistent cash flow before I would consider them attractive as a long-term investment.
As it sits right now I am finding very few solar companies which I view as investible. Presently, I consider Enphase (ENPH) as the most attractive player in the industry because of the extensive moat they have established around microinverters. Among panel manufacturers, which I am not that interested in because of the ongoing commoditization of the panels, Canadian Solar ( CSIQ ) is the most attractive I have found so far because of their expanding global exposure and potential future revenue growth. I am still hoping to find additional potential solar investments, so if any of you have suggestions for other companies in this industry which are worth looking into, please let the rest of us know in the comments.
For further details see:
SunPower Is Experiencing Improving Demand