SunPower Q1 Preview: Watching EMEA and U.S. Rooftop Business
SunPower (NASDAQ:SPWR), one of North America’s largest solar companies, is scheduled to publish its Q1 2014 results on April 24. We expect the company’s earnings to improve on a year-over-year basis, driven by higher global demand for solar products and manufacturing cost improvements. During Q4 2013, the company’s quarterly revenues (Non-GAAP) declined by around 3% year-over-year to around $758 million, while operating margins grew to around 9.5% from 7.4% a year ago. [1] Below is a brief look at some of the factors we will be watching when the company reports earnings.
See Our Complete Analysis For SunPower and First Solar
Trefis will be revisiting its $29 price estimate for SunPower following the earnings release.
Demand And Supply Trends In The Global Solar Market
According to research firm NPD Solarbuzz, demand for solar panels surged by over 35% year-over-year to around 9 gigawatts (GW) during Q1 2014. The United Kingdom and Japan emerged among the largest markets, together accounting for about one-third of overall solar installations. [2] Growth is expected to remain strong through this year, with the size of the global solar market crossing the 50 GW, up from less than 40 GW a year ago. Manufacturing capacity growth, on the other hand, is expected to be small, as spending on solar manufacturing equipment fell to an 8-year low during 2013. (New Solar PV Capital Expenditure Cycle to Start in 2015, According to NPD Solarbuzz, SolarBuzz )) This should bring about better supply-demand rationalization, potentially translating to improved pricing power for solar companies.
What We Will Be Watching In SunPower’s Earnings Release
1) Progress In The U.S. Rooftop Solar Space: Much of SunPower’s earnings growth over the last year came from the execution of its large-scale solar projects in the United States. However, growth in the U.S. utility-scale market is expected to slow down going forward. According to a report by Goldman Sachs, installations of utility-scale solar projects in the U.S. are expected to grow at just about 8% from 2013 to 2016, while the rooftop solar market will grow at a rate of about 45% over the same period. This could mean that SunPower will have to increase its focus on residential and commercial installations in the United States in order to drive its earnings. The company has a portfolio of high-efficiency solar panels that are well suited for rooftop installations. SunPower also offers a solar leasing option for residential customers. Some of the metrics we will be watching this quarter include SunPower’s shipments to residential and commercial installations, as well as its progress in adding new leasing contracts.
2) Margins In Europe, Middle East and Africa Region: SunPower’s margins in the EMEA (Europe, Middle East and Africa) region were relatively weak through much of last year due to subsidy cuts in key markets, as well as due to some underutilization charges related to some manufacturing facilities in the region. However, things have been improving of late, with gross margins from the region rising from under 10% in Q2 2013 to over 16% during Q4 2013, on the back of better demand as well as the company’s restructuring initiatives. SunPower has been seeing very strong demand for its top-end X-series (which have a conversion efficiency of around 21%) in Europe. This favorable product mix could bode well for the company’s margins from the region.
3) Cost Improvements For Panels And Systems: Over the last year, SunPower made solid progress on the cost front, driven by improving conversion efficiencies of its panels and better balance of systems costs for its power plant blocks. During 2013, the company was able to reduce its panel manufacturing costs by roughly 20% while it also cut the balance of systems costs of its systems by as much as 24%. [3] Costs are likely to be an important metric to watch for SunPower, particularly if it needs to gain share in emerging solar markets.
4) Progress Of Capacity Expansion Projects: SunPower’s cell fabrication facilities had an annual capacity of roughly 1,200 megawatts (MW) as of Q4 2013, and we estimate that they are currently running at near full utilization. The company intends to improve the throughput of its existing facilities to roughly 1,300 MW by the end of 2014 and is also building out its fourth fabrication plant (Fab 4), with a capacity of about 350 MW, in the Philippines. The company expects the cost per watt of cells from this unit to be about 35% lower than its existing “Fab 2” unit and has indicated that this unit would commence initial production from early 2015. The company’s progress in executing on these expansion projects will be a key factor to watch, given the demand growth and possible production capacity shortages in the solar industry.
See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Notes:- Q4 2013 Supplemental Data Sheet,SunPower, February 2014 [↩]
- Record-Breaking Demand for Global Solar PV Industry in Q1’14, SolarBuzz, April 2014 [↩]
- Fourth Quarter 2013 Earnings Supplementary Slides, SunPower, February 2014 [↩]