SunPower Price Estimate Cut To $10 Amid Tough Outlook

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SunPower (NASDAQ:SPWR), the second largest U.S. solar manufacturer, posted a mixed set of Q3 2016 results, missing revenue expectations, while cutting its FY’16 revenue and shipments forecast for the third time this year. We believe that things are likely to remain challenging for the company in the near term, given the oversupply situation in the global markets and also due to potential changes to environmental and renewable policy with the newly elected U.S. President. On account of the weak recent performance and challenging outlook, we are cutting our price estimate for SunPower from $15 per share to $10 per share.

See our complete analysis for SunPower

Review of SunPower’s Operating Performance And Guidance

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SunPower_Q3_1

Challenges Facing The Solar Market 

SunPower noted that average selling prices for panels declined by roughly 25% over Q3, amid tough industry conditions. Solar demand has declined significantly, led by China, which met a bulk of its installation targets during H1 amid the expiry of feed-in-tariffs at the end of June. Moreover, supply has also been expanding, with manufacturers bringing on additional solar capacity, creating an inventory overhang. Solar power plant PPA pricing also remains aggressive, amid competition from independent power producers and smaller players and also due to uncertainties in the U.S. market. There could be potential regulatory headwinds in the U.S. market as well. Renewable energy policy in the United States could be reshaped, with the Republican party – which favors free-market based renewbles development versus incentive-driven development – taking complete control of the U.S. government. There is a strong possibility that the federal government’s climate policy could be altered, reducing the urgency to shift towards renewables. Moreover, the U.S. solar ITC, which remains the bedrock solar incentive in the U.S., could also be at risk, as potential tax cuts put pressure on the federal budget. (related: Trump Presidency Could Mean A Rough Road Ahead For Solar Stocks)

SunPower Banks On Tech Advantage, Cost Cutting To Weather Downturn

While SunPower’s business is likely to take a significant hit on account of the market developments, the firm could leverage its technology advantage over rivals, as well as planned cost improvements to weather the downturn. SunPower has been focusing on improving its panel technology, offering mono-crystalline panels with the world’s highest efficiencies. The firm’s newest Fab 4 production facility has seen median cell efficiencies rise by roughly 80 basis points over the last 6 months to 24.7%. The firm has also been doubling down on integrated solutions such as the Oasis 3 power plant block and Equinox residential solutions, which help reduce soft costs and improve performance. SunPower is also hedging its bets with its low-cost multi-crystalline module, dubbed P-Series, which uses low cost solar cells sourced from the mass market, while providing better performance compared to traditional solar panels.

The firm is also aggressively re-positioning its business to cut costs. The company intends to lower its 2017 Non-GAAP operating expenses to $350 million (from roughly $450 million in 2015) while reducing its 2017 capex to around $100 million (down by about 50%). The firm will also optimize its production, focusing on the lowest cost, highest technology fabs and products. [1]  For instance, its top-end X-Series product platform will be favored over the mid-range E-Series, which has lower margins. The company will provide more details on its cost cutting initiatives during a conference call to be conducted on Dec. 7.

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Notes:
  1. SunPower (SPWR) Q3 2016 Results – Earnings Call Transcript, Seeking Alpha, November 2016 []