SunPower Q2 Preview: Margins In Focus

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SunPower (NASDAQ:SPWR), one of the largest solar panel manufacturers and solar system installers in the United States, is scheduled to release its Q2 2014 earnings on July 31.  During the first quarter, the company’s revenues grew by around 9% year-over-year to around $692 million, while adjusted margins grew to around 11% from 5% a year ago. [1] For this quarter, we expect earnings to fall on a year-over-year basis on the back of a possibly lower mix of project-related sales, although this could be partially offset by a better performance in the rooftop solar markets in Europe and the United States. The company has guided for non-GAAP EPS between $0.15 and $0.35 on revenues of $575 million to $625 million for Q2. [2] For this quarter, we will primarily be watching the company’s progress in reducing manufacturing costs.

Trefis has a $31 price estimate for SunPower, which is about 15% below the current market price.

See Our Complete Analysis For SunPower and First Solar

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Watching For Improvements In Manufacturing Costs To Drive Margins

SunPower’s gross margins stood at around 23% as of Q1. This is slightly lower when compared to competitor First Solar (NASDAQ:FSLR), which reported gross margins of close to 25% during the same period. What’s more concerning is that we believe that some of the key drivers of SunPower’s gross margins may be fleeting. For instance, much of  SunPower’s profits over the last few quarters have come from its high-margin (estimated to be around 30% gross margin) solar projects in the United States, which were negotiated at relatively lucrative terms several years ago. Most of these projects will be built out by 2016, and it seems unlikely that it will be able to realize similarly high pricing on the newer projects in the pipeline. Another recent driver of earnings is likely to have been the company’s sales to Japan, which has among the highest average selling prices in the world. However, the Japanese market is primarily subsidy driven, and SunPower could see a pricing decline in the future as the government gradually scales back its attractive feed-in-tariff program, as has been the case with most subsidy-driven markets.

Moreover, average quarterly solar module spot prices have hit historical lows of around $0.63 per watt during Q2, due to slightly lower pricing in Japan’s utility scale market and increasing demand from lower-priced regions like Latin America. [3] Given the relatively challenging market conditions and possibly less lucrative project sales, it seems likely that SunPower will need to bank on panel manufacturing process improvements and balance of system cost reductions to drive margins growth in the near term. Although SunPower doesn’t usually break out its panel manufacturing costs, it’s safe to assume that they are above the industry average. However, the company’s progress with cost cutting has been relatively encouraging in recent years. During 2012, SunPower cut manufacturing costs by around 20% while achieving a similar cost reduction over 2013. Now, the company has indicated that its newest manufacturing plant (called Fab 4), located in the Philippines, could reduce costs per watt by about 35% compared to the company’s current manufacturing lines. [4]

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Notes:
  1. Supplemental Operating Performance and Manufacturing Ramp Information, SunPower, April 2014 []
  2. First Quarter 2014 Earnings Supplementary Slides, SunPower, April 2014 []
  3. Solar Module Spot Prices Hit Historic Lows in Q2 2014, Greentech Media, July 2014 []
  4. SunPower Continues to Drive Down the Cost Curve, Greentech Solar []