2023-10-11 09:58:29 ET
Summary
- Sunrun Inc. and SunPower Corporation have seen significant declines in their equity value over the past three years.
- SPWR has a lower valuation and debt-to-equity ratio compared to RUN.
- Both companies face challenges in terms of debt, gross margins, and growth, but are positioned to benefit from long-term trends in the clean energy industry.
When the pullback of clean energy tickers entered its third year, bulls hoped there would be a moderation of a collapse that has seen Sunrun Inc. (RUN) and SunPower Corporation (SPWR) lose 81% and 65% of their equity values, respectively. It's been tough for long-term investment pitches regarding these tickers, even underpinned by strong government support for renewables, that are now entirely failing to resonate with a stock market looking to high inflation and a Fed funds rate currently sitting at 22-year highs as the main arbiters of valuation. It's easy to see why the bears hold sway here, though, with the business model of both solar rooftop companies highly dependent on layering debt to fund the installation of solar on the roofs of customers who mainly skip the upfront payment in lieu of long-term leases or power purchase agreements.
Which ticker is the better pick? It depends. $2.28 billion market cap and San Francisco-based Sunrun is currently trading hands at a price-to-trailing 12-month sales multiple of 1.05x versus a multiple of 0.48x for $907 million market cap SunPower operating out of San Diego. To be clear, SunPower can be picked up for half the valuation of Sunrun and would sport a roughly $1.98 billion market cap if it traded on the same sales multiple as its San Francisco-based rival.
Whilst I'm bullish on clean energy and hold a significant position in renewable yieldcos Clearway Energy ( CWEN.A ) and Atlantica Yield (AY), I've historically held off from an investment in the residential solar tickers. Both business models fundamentally look to leverage the same underlying dynamics by gearing up heavily to fund long-term secured cash flows.
Sunrun Vs. SunPower: Debt, Gross Margins, And Growth
Sunrun had a total debt balance of $10.02 billion as of the end of its fiscal 2023 second quarter. This meant a debt-to-equity ratio of 1.46x, around double the 0.73x of SunPower which also held a total debt balance of $403 million as of the end of its second quarter. Sunrun is more highly geared and faced $114.5 million in quarterly interest payments, around 19.4% of its second-quarter revenue and up 135% from its year-ago comp. SunPower recorded an interest expense of $5.8 million, 1.25% of second-quarter revenue, and down from $6 million in its year-ago period.
SunPower has the edge in the positioning of its debt and recorded gross profit margins of 13.92% for the second quarter, around 528 basis points in excess of Sunrun's 8.64%. Both tickers stand to ride the same compelling long-term trends, so it's hard to not be bullish on the wider industry. This optimism has always been countered by poor finances even against an incredible growth backdrop. Residential solar installation is set to grow by an 18% compound annual growth rate over the next 7 years for a $41.8 billion market in the U.S. by 2030. This includes solar plus battery storage, a package offered by both tickers. Sunrun offers a Tesla ( TSLA ) Powerwall, whilst SunPower offers its own storage system called the SunVault.
The 2022 Inflation Reduction Act is set to accelerate the deployment of U.S. residential solar installations with its provision of dual 30% tax credits on solar systems and energy storage technologies. This comes as the reduction of carbon emissions now forms a fundamental pillar of post-pandemic economic growth for the current administration. However, recent growth rates for both companies have been somewhat dire. Sunrun reported revenue of $590.19 million , up just 1% over the year-ago quarter and a miss by $40.89 million on consensus estimates. Net earnings assets increased $409 million to reach $4.4 billion with its net subscribers value at $12,321, an increase of $321 from the first quarter. Backup storage attachment rates for new sales were almost 2x to over 30%. This will push up net subscriber value with Sunrun's networked storage capacity installed at 918 total Megawatt hours . This grew 103 Megawatt hours, around 35% year-over-year growth.
The Fed's Great Disruption And California Headwinds
SunPower has a higher growth rate, with second-quarter revenue of $463.85 million growing by 11% over its year-ago quarter but still missing consensus estimates by $14.38 million. The company dipped heavily after its earnings, as it pulled back on guidance on the back of what management cited as a weakening demand environment, broader macroeconomic uncertainty, and rising rates. Adjusted EBITDA is now expected to be between $55 million to $75 million for the full year 2023, down from a prior forecast of $125 million to $155 million. The company will now see a full year GAAP net loss of $70 million to $90 million. Critically, Sunrun is profitable and reported a net income of $55.5 million for the second quarter versus a net loss of $33.1 million from SunPower. This dichotomy helps explain the difference in valuation between both companies.
SunPower is now chasing a cost-cutting plan that will reduce its workforce by 5%, a loss of roughly 140 roles. The business model has also recently experienced some headwinds with California cutting the home solar incentives. This April 15, 2023, move ran in contra to recent credits implemented by the White House but was designed to boost the uptake of home batteries. Homeowners could previously sell their surplus electricity back to California's energy grid for a near dollar-for-dollar credit on their electricity bills. This credit has been cut by 75%, rapidly increasing the payback time of residential solar and contributing to the dip in revenues seen during the quarter with the state the largest geographic market of both tickers. This comes with a Fed's funds rate currently at 5.25% to 5.50% rapidly dampening investor appetite for the highly geared residential solar space. I don't plan on taking a position here, though, with SunPower's cheapness countered by Sunrun's recent profitability.
For further details see:
Sunrun Vs. SunPower: Which Stock To Buy, Clean Energy Collapse Looks For Reversal