SunPower Q2 Preview: U.S. Market And Changing Cost Dynamics Will Drive Results

by Trefis Team
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SunPower (NASDAQ:SPWR) is expected to release its Q2 earnings on July 31. We believe the company’s results for this quarter will be fueled by the expanding North American solar market, an increasing trend towards higher efficiency panels and also by improving utilization rates. On a GAAP basis, the firm has guided quarterly revenues between $540 million and $590 million, gross margin of 13% to 15% and net loss per diluted share of between ($0.25) to ($0.15). [1]

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The U.S. Solar Market Will Drive Results

The U.S. solar market has been growing rapidly. The Solar Energy Industries Association (SEIA) expects 5.3 gigawatts (GW) of solar power to be installed  in the United States this year, up from around 3.3 GW last year. We believe that SunPower, which is currently the market leader in both the commercial and residential markets in the United States is well poised to benefit from an increase in demand thanks to its portfolio of high efficiency panels, which are well suited for rooftop installations. The firm is also likely to benefit from its residential solar leasing program which allows customers to install solar power systems by making monthly payments, enabling them to avoid large upfront costs.

SunPower has also been making a big push into the utility-scale solar power plant space in recent times. Building large scale projects is attractive to SunPower since it involves providing engineering, procurement and construction services along with solar panels. The larger volumes and economies of scale are also likely to help the company’s margins. During Q1, SunPower began construction on its 579 MW Antelope Valley Solar project for MidAmerican Solar and also reached the final stages of construction on its California Valley Solar Ranch project for NRG Energy, and we expect these projects to contribute to the firm’s Q2 results as well. We will also be interested to hear about the company’s progress in expanding its projects business overseas.

Changing Panel Vs. Balance Of Systems Costs Equation Will Work In SunPower’s Favor

SunPower’s standalone panels sell for more than $1 per watt while Chinese panels sell for around $0.70 or less. While the price difference is quite large when viewed in isolation, it becomes less of an issue when we consider the price of the entire solar power system. For instance, the average residential PV system in the U.S. costs around $5 per watt while the average non-residential system costs $4 per watt, meaning that panel prices are just a fraction of the total costs. ((SEIA)) This means that consumers may actually be willing to pay more for SunPower’s monocrystalline panels given their higher efficiency, reliability and smaller area. Additionally, these higher efficiency panels will need less mounting equipment which could actually help to offset some costs associated with higher panel prices. We believe these changing total cost dynamics could help SunPower gain market share at the expense of Chinese manufacturers who have been competing primarily based on price.

Restructuring In Europe And Improving Utilization Rates

SunPower’s European Middle East and Africa (EMEA) operations have been a drag on its margins over the last year. In Q1, the EMEA business posted gross margins of around negative 33% primarily due to underutilization charges related to a factory in Europe. However, the firm is continuing with restructuring initiatives in the plant and expects the EMEA division to return to profitability from the second half of this year.

SunPower has around 1,300 MW of manufacturing capacity. In 2012, the company shipped around 863 MW of panels and it expects shipments upwards of 1 GW for this year. This should help improve company-wide margins going forward as the manufacturing capacity is put to better use and cost absorption improves.

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