SunPower Jumps On North American Project Executions

by Trefis Team
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SunPower (NASDAQ:SPWR) released its Q1 results May 2, and it was aided by construction activity on its power plant contracts in the U.S. as well as strong demand from Japan. Quarterly revenues grew by around 28% over last year to $635 million (GAAP) while the net loss narrowed to around $55 million. The results beat market expectations sending the stock higher by almost 20% since the release.

Here are some of the key takeaways from the company’s earnings release and what they imply for the stock going forward.

Power Plant Projects And Leasing Brighten Results In The Americas

Revenues from the Americas segment grew by around 71% year-over-year to $484 million while gross margins remained relatively flat at around 14%. While total panel shipments to the region were actually down by around 25% to 72 MW, the power plants business was the key driver of the division’s business and margins. [1]

During the quarter SunPower commenced the initial construction on its 579 MW Antelope Valley Solar project for MidAmerican Solar and reached the final stages of construction on its California Valley Solar Ranch project for NRG Energy. (Related Read: How SunPower Benefits From The MidAmerican Deal) The firm mentioned that these projects along with the 200 MW of projects signed recently should add around $3.5 billion in unrealized revenues between 2013 and 2016. [2] Building megawatt-scale projects are attractive to solar firms due to the larger volumes and relatively lower exposure to the volatility in solar panel prices.

Things looked reasonably good in the rooftop space as well with the residential leasing program continuing to show progress. SunPower added around 2,100 leases through this quarter and has 16,200 cumulative lease customers to date. Leasing solar power systems has gained popularity of late since it allows customers to install solar power systems by making monthly payments, enabling them to avoid the large upfront costs.

EMEA Continues To Be Slow But A Turnaround Isn’t Far

Business from the EMEA region continued to be weak as expected, particularly due to weak market conditions in Europe. Sales declined by around 55% since last year to $69 million while gross margins were negative 33%. The negative gross margins were primarily due to under-utilization charges related to a factory in Europe. However, the firm expects the division to return to profitability towards the second half of the year as it continues with its restructuring initiatives and ramps up production from the currently under-utilized factory.

Additionally, the firm has been focusing on the Middle Eastern market by leveraging the relationships of its parent company Total SA, which is Europe’s third largest oil company. Total has a significant presence in the Middle East and Africa and could help SunPower further its presence in these regions. SunPower said that it was making inroads into Saudi Arabia by starting a few demonstration projects in collaboration with a local university there. Saudi Arabia is viewed as one of the most promising markets for solar power in the Middle-East since the government has earmarked around $109 billion over the next two decades to build the solar industry.

Japanese Shipments Boost APAC Results

The Asia-Pacific business continued its strong run with revenues growth of around 46% year-over-year to around $82 million. SunPower’s business in Japan was particularly strong this quarter with the shipments to its Japanese partners Toshiba and Sharp accounting for 25% of total first quarter shipments. While most of its Japanese business comes form the residential market, the firm has mentioned that it was working with Toshiba in the in the mega watt scale system area as well.

SunPower’s high efficiency product line is a good fit for the Japanese market, which requires better conversion efficiency given the lower availability of real estate in the country. The Japanese government has been providing feed-in-tariffs which are among the highest in the world to encourage installations. Average selling prices in the country are also typically higher than the rest of the world. However, we believe that there is a possibility that the firm could face some near term pricing pressures in Japan due to the weak yen. (Related Read: A Look At The Japanese Solar Market)

Summary Of Model Changes

We have updated our model and price estimate for SunPower to account for the quarterly earnings. We have increased our forecasts for the company’s shipments to the APAC region in keeping with strong momentum from markets such as Japan. We have also increased our forecast for EBITDA margins in the EMEA segment given that the division is likely to return to profitability by the end of this year as restructuring takes effect. Our revised price estimate stands at around $12.25 which is about 20-5% below the current market price.

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Notes:
  1. SunPower Supplemental Information []
  2. Seeking Alpha []
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