What’s Driving SunPower’s Business in The Americas?

SunPower‘s (NASDAQ:SPWR) Americas division, which includes operations in North America and Latin America, is the firm’s most important business segment,accounting for around 70% of sales and 80% of the Trefis price estimate for the stock. We view the division as critical to the firm’s long-term growth due to growing uncertainties in other markets like Europe. In this article we review some of the key factors and trends that will drive the division’s performance going forward.

How Has The Division Been Performing?

Shipments to the Americas have grown at a compounded annual rate of around 80% over the last 2 years to around 470 MW in 2012. Most of the increase has come from growth in rooftop installations in the United States and also due to the company’s growing interests in the utility-scale power plant space.  Most of the business comes from the U.S. and the performance of the division broadly tracks the U.S. solar market. In 2012, the U.S. market expanded by around 76%.

However, things have been less sanguine on the pricing front as the average selling price per watt (which includes prices of both panels and related equipment) has declined from around $4.40  to around $3.60 over the past two years. This has led to sluggish revenue growth as well as weaker EBITDA margins. Margins declined from around 13% in 2010 to around 7% in 2012.

Factors That Will Impact Performance Going Forward

Utility Power Plant Demand: The utility scale market has been the fastest growing segment within the U.S. solar market. Installations rose from around 760 MW in 2011 to around 1781 MW in 2012. ^[1] Utility scale projects are attractive to solar firms since they command better margins and provide an avenue to boost module sales. SunPower has been steadily gaining traction in this space. In January, the firm announced that it had sold its 579 MW Antelope Valley Solar Projects in California to MidAmerican Energy in a deal valued between $2 billion and $2.5 billion. The deal should help the firm improve its brand image and cement its position as a key player in this space. Increasing utility solar projects will help to drive the shipments as well as EBITDA margins higher.

Residential Leasing: SunPower has a strong distribution network in the U.S. and now operates a solar equipment leasing scheme to reduce the upfront cost of installing solar power systems. The firm installed around 75 MW of leased systems in 2012, making it the U.S. market leader in solar leases.  The firm already has Citibank and Credit Suisse backing its leasing program and recently closed a financing deal valued $100 million with U.S. Bank.

Government Incentives: While the U.S. government doesn’t offer feed-in-tariffs or significant direct subsidies for solar installations like countries in the E.U., support has been passive and relatively stable. The renewable portfolio standards imposed by most individual U.S. states require (or encourage) utility companies to derive a certain minimum share of the electricity generation from renewable energy sources. Besides this, the U.S. investment tax credit, which offers 30 percent tax credit for individuals and businesses who purchase solar power systems will also continue to spur investment in solar. The credit will be in effect until 2016 at the least, and this could help to drive sales in the near term. ^[2]

Growth From Latin America: While SunPower doesn’t report separate revenues from Latin America, we believe that business from the region is presently very small in comparison to the U.S. business and offers strong growth potential. Most Latin American countries have high electricity costs and receive good solar insolation, which makes solar power more competitive with traditional sources of electricity. For instance, electricity prices in Brazil, the largest and most populous country in the region, are over $0.12 per kilowatt hour (kWh) compared to prices of around $0.06 per kWh in the United States.

Panel Prices Constituting A Smaller Portion Of Systems Costs: SunPower’s stand alone panels sell for above $1 per watt while Chinese panels sell at around $0.70. While this is a significant price difference when viewed in isolation, it is becoming less important when the price for entire solar power systems is considered. Panel costs now account for 40% (or less) of overall installed system costs and are less likely to be a key factor in the purchase decision. Consumers may actually be willing to pay more for SunPower’s monocrystalline panels given their better efficiency, reliability and smaller area.

Duties On Chinese Imports: In 2012, the U.S. Department of Commerce completed its investigation into the import of Chinese solar cells and imposed anti-dumping and countervailing duties of between 24% and 250% on products that contained cells sourced from China. This could help U.S. manufacturers like SunPower, making their  products more competitive on price with Chinese imports.

We have recently updated our model for SunPower to incorporate the firm’s updated reporting structure. Our revised model consists of 3 divisions – the Americas, Europe, Middle East and Africa (EMEA) and Asia pacific (APAC).

Understand how a company’s products impact its stock price on Trefis

1. SEIA [↩]
2. Solar Investment Tax Credit, SEIA [↩]