Power Plant Headwinds Prompt SunPower Selloff, How Is The Firm Looking To Navigate The Downturn?

SunPower (NASDAQ:SPWR) posted a better than expected set of Q2 2016 results on Tuesday, although it warned of meaningful near-term challenges in its once lucrative power plant business, which prompted the firm to reduce its 2016 guidance, realign its manufacturing operations and reduce its headcount by roughly 15%. The markets reacted very negatively to the news, sending SunPower’s stock down by close to 30% in Wednesday’s trading. Below we take a look at some of the factors behind the slowdown and how SunPower is looking to navigate it. ^[1]

See our complete analysis for SunPower

We will be revisiting our $23 price estimate for SunPower to account for the recent earnings release.

Why Is The Utility-Scale Market Slowing Down? 

Contracting activity in the utility-scale solar business has slowed down for multiple reasons.  Firstly, the uncertainty relating to the extension of the U.S. solar investment tax credit, which was slated to expire after 2016, resulted in strong completions over the first half of 2016 as comapnies executed on projects to meet certain contractual milestones. However, as the ITC was extended in December 2015, it has reduced the urgency for project completions by the end of this year, allowing customers longer-term horizons to complete projects, while weakening demand for the second half of 2016 as well as 2017. There has also been greater competition from smaller players and independent power producers in the project development space, impacting the prices at which PPAs are being signed globally. Additionally, investor IRR expectations for solar power projects have trended upwards over the last few months, driven partly by the SunEdison bankruptcy. ^[2]

What Is SunPower Doing To Navigate The Downturn? 

SunPower intends to reduce its exposure to the self-development of utility scale projects in international markets, while focusing on a few core regions such as the the U.S. as well as Latin America and France. The move should allow the firm to cut down on its capital as well as operating expenditures. In other regions, SunPower intends to focus on equipment sales, promoting products such as its Oasis integrated power plant blocks as well as its multi-crystalline P-series modules.  The company also intends to delay some projects until 2017 or 2018 to leverage declining input costs for its P-Series modules, which are manufactured using third-party solar cells. Solar cell prices are trending lower, amid strong supply and manufacturing capacity expansion.

SunPower will also be realigning its manufacturing operations and product mix to adjust for the near-term weakness. For instance, the company will reduce production of its E-series panels, which are primarily used in power plants, while bolstering production of its higher-value X-series modules that are seeing strong demand in the distributed solar market. The company will also close down one of its facilities in the Philippines, while transferring equipment to its Mexican module assembly facilities, which are highly automated and are also closer to its principal markets. Overall, SunPower expects these changes to impact its 2016 output volume by roughly approximately 150 MW, although it expects its longer term manufacturing capacity ramp beyond 2017 to remain largely intact. The company is targeting a workforce reduction of about 1,200 employees, primarily in its Philippines operations, and will take a $30-$45 million restructuring charge (over 50% in cash), a majority of which will be booked during Q3.

Overview of Results and Guidance 

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. SunPower Q2’16 Earnings Presentation [↩]
2. SunPower (SPWR) Tom H. Werner on Q2 2016 Results – Earnings Call Transcript, Seeking Alpha, August 2016 [↩]