SunPower (NASDAQ:SPWR) released its Q1 results last week, posting a sequential drop in revenues in almost all major markets as demand for panels slowed down. Global panel sales are expected to show a yearly drop in 2012 as leading markets like Germany see a pullback in government subsidies.  SunPower is responding to the changing markets by focusing on its niche, high efficiency panels while taking steps to make itself more cost competitive. The company is facing strong competition from Chinese players like Suntech Power (NYSE:STP), which have responded to the downturn in the industry by aggressively cutting prices.
We have revised our price estimate for SunPower to about $7.50, a 30% premium to its current market price.
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Strategic focus shifting
SunPower is focusing on the residential and leasing segments in the American market, which was the biggest contributor of revenues in the last quarter. The company saw its sales decline in two of its three main geographical markets. Sales in the American market dropped to $367 million, registering a 28% drop over the previous quarter. Sales in Europe and the Middle East (EMEA) declined by 37%, while revenues from the Asia Pacific (APAC) region showed a modest 6% sequential increase. Margins in the EMEA region fell down to 2.2% in the quarter as low demand from countries like Germany factored into its performance. Margins in Americas and APAC stood at 16.5% and 14.5% respectively in Q1 2012.
Going forward, SunPower is focusing on reducing its manufacturing and operating costs to stay competitive in the low price market. While the company will continue to develop its industry leading high efficiency panels, it is also taking steps to reduce supply chain inefficiencies and make its manufacturing process more seamless.
The company announced the closure of one of its fabrication plants in the Philippines recently. SunPower is hoping that these changes will help reduce its cost of manufacturing panels to about $0.86/watt.
Financially, the company is also looking to shore up its balance sheet position by retiring some if its debt and shifting to a demand driven supply chain and improving inventory turns. We have revised our sales outlook for the company and updated our margin and cost estimates to arrive at our $7.45 price estimate for its stock.Notes: