Last week, the Flaneur told you that solar energy is here to stay. We encouraged you to look past the stream of negative press, past recent earnings announcements, and even past rumors of bankruptcies to focus on the big picture. Some thought the Flaneur had strayed too far from the path on this one. Some of you were skeptically intrigued. And while any positive outlook on the industry is clearly the dissenting opinion, a minority shares the same thesis. But to concede: the near-term challenges that lie ahead will no doubt result in sustained losses for some players, and those sustained losses will result in a rash of bankruptcies and/or fire sales. But where there are losers, there will also be winners.
So, what’s the play? Glad you asked. The Flaneur recommends a long-term, long position in SunPower (SPWR). A rising tide certainly lifts all ships as witnessed from 2006-2008. However, a sinking ship drowns everyone on board, as currently playing out with some of the lesser players. The Flaneur thinks SunPower is prepared to survive the storms and squalls and sail off into the sunny future.
Now, our team takes you through the fundamentals. – The Flaneur
IT’S ALWAYS SUNNY…IN SAN JOSE?
Today, we’ll dig into one of the industry’s major players and tell you why we believe SunPower Corp. is here for the long haul. SunPower, a global top-10, San Jose, California-based manufacturer is poised to capitalize on the mantra: first survive, then thrive.
There are many general positioning points as to why SunPower and several other industry players will survive. Our focus here, though, is on what SunPower does or has that’s better than its competitors. Why is SunPower positioned to be best in class?
- Better R&D – Electricity is a commodity. No matter the source, free-flowing electrons power a light bulb or a cable car in exactly the same manner. And that pertains equally to the source of electricity. A 250-watt solar panel generates exactly the same amount of instantaneous electricity as the next 250-watt panel. Where they differ, though: the less efficient panel requires more material and thus more space to produce exactly the same amount of electricity in the same conditions. Why this matters: SunPower has long been the efficiency leader in the industry. A theoretical rooftop or 2-acre parcel of land have obvious limitations. One can only integrate as much solar as there is rooftop or there is land. When there are constraints at play (and there often are), the efficiency of the panel becomes an acute focus. In an industry with largely-standard warranties, uniform supply chain dynamics, and similar product selection (from a power production standpoint), SunPower’s high efficiency edge creates the closest thing to a technological advantage in the industry.
- Well Capitalized– a look at SunPower’s balance sheet reveals no near-term debt issues and ample cash on hand. This is more than can be said for some of the Chinese competition as the debt-to-worth figure below suggests.
- TOTAL SA Interest – the energy giant, TOTAL SA, owns a majority 66% stake in SunPower. By extension, Total’s presence significantly bolsters SunPower’s balance sheet and affords SunPower access to cheaper capital; with an investment of this size, the Flaneur doesn’t see TOTAL allowing SunPower to die on the vine.
- Well Positioned Along the Entire Value Chain– SunPower is strategically positioned along a lengthy industry value chain as illustrated in the figure below.
While many players are in one, maybe two, segments of the value chain, SunPower’s position along the majority of the value chain not only allows it to control costs but equally importantly affords the company valuable upstream and downstream intel. This enables SunPower to be close to the customer and close to the source.
That’s good today. But what about tomorrow? The forward-looking Flaneur sees the following:
- Gross Margin Stabilizing– the industry is still in oversupply mode, but SunPower appears to have turned the corner with gross margins stabilizing. With stabilized margins and continued revenue growth, we think the company may be approaching scale 2.0. As the figure below shows, SunPower’s gross margin is higher than major Chinese competitors, some of whom (Trina and Suntech) continue to experience margin erosion.
- Supply/Demand Dynamics in Check – SunPower’s annual production capability stands at approximately 1,000 megawatts according to EnergyTrend. In 2011, the company shipped 922 megawatts. While some may view this as a potential bottleneck, the Flaneur views this as efficient asset utilization particularly when compared to some of the Chinese competition. Companies such as China-based Hanwha Solarone Co. Ltd. can produce upwards of 1,500 megawatts annually; however it shipped just 844 megawatts in 2011. We think Hanwha and many of the other Chinese players tried to do too much, too soon and, now in an environment where prices are falling more rapidly than costs, are stuck with big bills to pay.
- Commitment from TOTAL SA– longtime shareholder TOTAL SA upped its stake in 2011 to become majority shareholder. In that time, the companies have demonstrated a positive working partnership and just last month announced the joint commissioning of a production facility capable of delivering 44 megawatts of solar panels annually. Overall, there are two clear takeaways:
- SunPower is a significant investment for TOTAL, and
- Total is fully committed to SunPower and thus to solar energy. As an absolute worst case, we see TOTAL acquiring the remaining stake in SunPower and bringing the company fully in house.
- Well Positioned in Key Markets–SunPower’s revenue breaks down favorably. The company’s 2011 annual report defined its target markets as: (i) North America, (ii) EMEA — Europe, Middle East, and Africa, (iii) Asia Pacific. We think this is a healthy balance of developing (rapid growth, but fluid), maturing (rapid growth that will taper in the medium term), and mature (lower growth, but consistent demand).
- 51% of the company’s 2011 revenue was generated in the United States. And though the US doesn’t hold the same renewables reputation as does Europe, the reality is that the US solar market more than doubled (in terms of installed capacity) in both 2010 and 2011 and experienced impressive growth rates even through the broader downturn in 2008 and 2009. What’s driving growth in the US? 29 states plus the District of Columbia have implemented so-called Renewable Portfolio Standards (or Alternative Energy Portfolio Standards) that mandate electricity suppliers source a certain percentage of their energy from renewable sources. 16 of these plus Washington, DC have a specific solar provision and in many of these markets the requirement doubles, triples, or even quadruples each year.
- And then, at 37% of revenue, there’s Europe. Much has been made of cuts and proposed cuts to incentives in major markets. But while we expect growth in demand to be curbed, the European market isn’t going anywhere. Germany announced that on May 26, 2012, 40% of the country’s total midday energy demand was sourced from solar energy. That’s quite a feat and that accomplishment actually spelled lower energy costs for all. And that’s in Germany, whose solar profile is equivalent to that of Fairbanks, Alaska. France and Italy both enjoy considerably more sunny days than their German counterparts. Bottom line: the potential is too great and these markets have come too far to simply turn their back on the technology now.
- Finally, much of the company’s 12% “Rest Of World” revenue is from Japan which will continue to be a source of growth as the country scrambles to backfill power generation needs left by the decommissioning of its nuclear plants. At the same time, SunPower has made significant inroads to the Indian market which has started to actualize its long-discussed massive solar energy potential. We expect this to be a major source of growth going forward.
- Continued Innovation in Efficiency – SunPower continues to push the efficiency envelope. After setting a Guinness Book of World Records high water mark for solar energy efficiency in 2011, the company began selling the commercialized panels earlier this year. With a strong R&D partner in TOTAL SA, we expect SunPower to carry on as the industry’s leader in efficiency.
The seat belt light is off, seats are back, and in-cabin service has begun…however, near-term turbulence is certainly possible and in fact likely. So keep those seat belts fastened, but please, don’t assume the plane is going down. You’ll live to see another sunrise. And that sunrise means profits for SunPower and for you.
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Disclaimer: At the time of publication, the Flaneur does not hold any positions in the stocks referenced herein. As with any investment, the Flaneur recommends you contact your financial advisor before making any personal investment.