SunPower $25 Fair Value Driven By Growth In U.S. Utilities And Japanese Solar Adoption

SunPower (NASDAQ:SPWR), one of America’s largest solar companies, has seen its stock price rise by almost 300% this year aided by a significant project contract win in California and strong earnings over the first two quarters of this year which beat market expectations. We believe that the near term outlook for the company remains positive, thanks to the firm’s impressive product portfolio as well as due to its progress in rapidly expanding solar markets such as Japan. We have a price estimate of around $25 for SunPower which represents a 15% premium over the current market price. Here is a quick look at some of the key factors that we believe will drive the company’s business going forward.

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Room To Grow In The Utility Scale Market In The U.S.

The Americas remain SunPower’s largest geographic market accounting for around 70% of the company’s total sales. The company is the market leader in the commercial and residential space in the United States and has also been making some significant progress in the utility scale space in the country in recent times. SunPower currently has two large solar projects in the U.S. – the 250 MW California Valley Solar Ranch (CVSR) project for NRG Energy and the 579 MW Solar Star projects for MidAmerican Solar. We believe that there is significant room for the company to grow its activity further in the large capacity projects in the coming years given that the utility solar sector in the U.S. is projected to account for over 40% of new installations over the next four years. ^[1]

We believe that SunPower, which manufacturers high efficiency monocrystalline panels, could have a distinct competitive advantage in the utility scale space going forward. The cost of  the solar panels is becoming a smaller part of the overall systems costs (under 20% of total costs) while other components such as switch gear, inverters and mounting equipment account for the rest of the costs.

Although we estimate that SunPower’s panels are at least 25% to 30% more expensive than polycrystalline panels, the price difference is likely to be quite small when viewed from the perspective of the entire project. Additionally, considering that SunPower’s panels are more compact and efficient, they could actually help to reduce some of the balance of systems costs, such as costs associated with mounting the panels. Additionally, since the footprint of SunPower’s panels is smaller for each watt of power, this would allow for the installations of a larger capacity in a given acreage as compared to projects that use thin-film or polycrystalline based panels.

Opportunities In Japan

Japan is one of the fastest growing solar markets in the world. According to GTM Research, solar installations in the country could touch 6.1 GW this year making it the world’s second largest solar market in terms of shipments. Given that systems prices in Japan are among the highest in the world, the country could become the largest solar market in terms of revenues, and this makes it a very attractive market for panel manufacturers, especially from a margin standpoint.

SunPower’s products are ideally suited for the Japanese market, which is skewed towards high-quality and high efficiency panels. The company estimates that it has around 10% market share in the Japanese residential solar market. ^[2] SunPower also has panel supply agreements with Sharp (Japan’s largest solar panel vendor) and Toshiba. While the company does not breakout its sales to the Japanese market, it reported that sales to the region grew to an all-time high during Q2 2013, helping its Asia Pacific sales to grow by over 100% since Q2 2012. While the Japanese market is still largely driven by distributed solar power generation, the market for utility-scale solar has also been growing. SunPower recently bagged a 25 MW panel supply deal for a solar project in Japan and the company has also mentioned that it was seeing more power plant related opportunities in the country.

Although the current growth in the Japanese market is being fueled primarily by generous feed-in-tariffs, which stand at around $0.38 per kilowatt-hour at the moment, we believe that it could continue over the next few years. ^[3] The feed-in-tariffs are valid for 10 years for small rooftop installations and for 20 years for large scale installations, although there could be periodic rate cuts as systems prices decline.

Better Operating Efficiencies And Margins

Given the strong demand and outlook, the second quarter turned out to be particularly good for the company from an operational standpoint since all its manufacturing facilities ran at near full capacity. Higher utilization rates enable companies to better absorb fixed costs and improve their margins. SunPower’s gross margins grew from around 12% in Q2 2012 to about 18.7% in Q2 2012, thanks to better utilization rates and a greater portion of project revenues. We believe that SunPower’s margins could grow further going forward as the company expects utilization rates to remain strong through the rest of the year, as well as for a significant part of next year.

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1. SEIA [↩]
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3. Greentech Media [↩]