SunPower Price Estimate Raised To $9 On Plant Deals

Earlier this month, SunPower (NASDAQ: SPWR) entered into an agreement with Warrant Buffet’s MidAmerican Energy to build and sell two solar power plants in a deal valued at between $2 billion and $2.5 billion. The plants, which will have a total generation capacity of 579 MW, will be the world’s largest photovoltaic solar installations.

We viewed the contract as a vote of confidence in the firm’s financials and its ability to execute large scale solar power contracts (See: How SunPower Benefits From The MidAmerican Deal). Taking into consideration the size of the deal and the growing prospects for the firm in building utility scale solar projects, we have increased our price estimate for the firm from around $5.20 to $8.80, which is about 15% ahead of the current market price.

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Summary Of Model Changes And Rationale

Increased Sales Volume: The utility scale solar market is witnessing a boom of sorts worldwide as installation costs decline and utility firms are beginning to see solar power as means of quickly adding clean and relatively economical generation capacity. Global utility-scale PV installations for 2012 exceeded 8.5 GW, almost double the installations recorded in 2011.

SunPower’s utility scale business has been expanding with shipments growing from around 110MW in 2009 to nearly 400 MW in 2011. However the firm still trails industry leader First Solar, which has a sizable project pipeline and enjoys better brand perception in the North American utility space. The MidAmerican deal, which involves constructing the world’s largest permitted photovoltaic power plant, could help SunPower improve its brand image as a utility scale builder and boost sales of its utility scale components business as well.

We have increased our estimate for  utility scale components shipments to around 1150 MW by the end of the Trefis forecast period, up from our previous estimate of 950 MW.

Higher Margins: The turnkey utility scale business is also more lucrative since it involves larger, longer term contracts for modules supply that help boost economies of scale. This segment of the solar market also sees relatively less competition from Chinese solar firms, which are known to be very aggressive with their pricing. The projects that SunPower is building incorporate sophisticated technologies like solar trackers, and as a result are likely to have higher margins. We have increased our forecast for utility-scale components EBITDA margins from around 10% at the end of the Trefis forecast period to around 12%.

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