Where Is SunPower Headed In 2015?

SunPower (NASDAQ:SPWR), one of the largest U.S. solar manufacturers, had a relatively mixed 2014. The company’s revenues and margins are expected to remain relatively flat year-over-year, owing to its panel capacity constraints, falling prices and the gradual completion of its lucrative large-scale U.S. projects. However, the company did reasonably well on the strategic and marketing front, making key acquisitions and forging partnerships to improve its solar technology, while also improving its global pipeline of utility scale projects. In this note, we take a look at what to expect from SunPower going into 2015.

Trefis has a $33 price estimate for SunPower, which represents around a 25% upside to the current market price.

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Executing On Global Utility Solar Pipeline: SunPower’s large-scale projects such as the 579 MW Solar Star and the California Valley Solar Ranch in the United States have been key drivers of the company’s performance over the past two years. These projects have been very lucrative for the company, generating gross margins of as much as 30%, which is far higher than the margins from the company’s other revenue streams. However, the North American utility solar markets could be poised to slow down meaningfully over the next few years, as many utility companies have already lined up projects to meet their current renewable energy portfolio standards (RPS) requirements. ^[1] SunPower has been looking to diversify its project business away from North America, and into markets including the Middle East, Latin America and Africa by leveraging its relationship with its parent Total S.A., one of Europe’s largest oil companies. The company  has more than 10 GW of power plants projects in the pipeline, spanning  325 projects in over 25 countries. We believe that its progress in developing these leads will be a key factor to watch going into 2015.

Growth In The U.S. Residential Solar Market: SunPower’s distributed generation business has been reporting solid results over the last few quarters, driven by installation growth in markets such as Japan and the United States. We expect the segment to be an important driver of the company’s results going into 2015 as well. Residential installations in the U.S. grew by around 58% during Q3 and the market has been displaying consistent growth, unlike the volatile non-residential sector. Residential solar is expected to become the single largest component of the U.S. solar sector by 2017.  The improved availability of financing is playing an important role in driving U.S. project growth, with lenders becoming more open to funding projects as solar technology matures. According to Bloomberg New Energy Finance, investments in small-scale renewable projects, including rooftop solar, stood at around $18.3 billion during Q3, up from around $13.9 billion last year. ^[2] Additionally, installation growth could accelerate prior to the cuts in the U.S. solar investment tax credit (ITC) slated for the end of 2016. The ITC is expected to drop from 30% to 10% for commercial projects and to zero for directly owned residential projects.

SunPower’s Capacity Likely To Expand At Slower Pace Than Market: Global solar installations are expected to have grown by over 20% to around 48 GW in 2014, and the figure is estimated to rise to about 58 GW next year, according to Bloomberg New Energy Finance. ^[3] While SunPower has been running its factories at near full utilization to meet demand, its manufacturing capacity has been expanding at a slower rate compared to the market and this is likely to be restricting its market share growth. Unlike Chinese players who have had the luxury of acquiring capacity or outsourcing production to third parties, SunPower’s high-end monocrystalline solar cells likely require more sophisticated fabrication technologies. While the company is taking several steps to address its capacity constraints and intends to triple its capacity by 2019, it may not be able to fully meet demand growth in 2015. SunPower’s manufacturing capacity is expect to grow by about 15% year-over-year to about 1.5 GW, due to a slower than anticipated ramp up of the company’s upcoming 350 MW Fab 4 plant in the Philippines. ^[4] The company’s next generation Fab 5, plant, which would have a manufacturing capacity of over 700 MW, is expected to start production in the second-half of 2017.

Setting Up A Solar Yieldco Will Be Beneficial : SunPower has been mulling the creation of a yieldco (or yield company) and is expected to make a definitive decision sometime next year. Under a yieldco structure, the company would spin off its operational solar power projects into a separate publicly listed company. The Yieldco structure could prove helpful for SunPower, since it would allow the company to shift projects into the Yieldco, potentially gaining cheap funding to expand its projects business. Yieldcos offer among the lowest costs of equity funding for renewable energy projects for several reasons. Firstly, these companies generate stable and predictable cash flows by selling their electricity under power purchase agreements and distribute most of their cash through quarterly dividends. Secondly, the model allows investors to single out the cash flows generated by the power generation assets without giving investors exposure to other aspects of the parent company’s business.

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1. First Solar Seeking Growth to Replace Giant Desert Plants, Bloomberg, March 2014 [↩]
2. Bloomberg New Energy Finance releases Q3 renewable energy investment report, Renewable Energy Focus, October 2014 [↩]
3. BNEF: global solar to grow to close to 60 GW in 2015, PV Magazine, November 2014 [↩]
4. SunPower Q3 2014 Supplementary Data [↩]