SunPower (SPWR)

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POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of SunPower's value that present opportunities for upside or downside to the current Trefis price estimate for SunPower:

Power plant division

  • SunPower's Power Plant EBITDA Margins : SunPower's power plant margins have ranged from between 14% to 18% between 2013 and 2015. However, margins fell to just about 3% in 2016, amid sales of lower margin projects and the company's decision to reduce its exposure to self-developed projects. The metric stood at 10% in 2016 and we expect it to remain at current levels over the long-term, as SunPower transitions to a solutions model. However, if the company is able to improve margins to about 18% by the end of the forecast period leveraging its new technology deployments, this could result in a 30% upside to our current price estimate.

  • Average selling price per watt - power plants:
    SunPower's Average selling price per watt - power plants has seen significant volatility over the last few years due to lumpy revenue recognition on its large scale projects and potentially due to changes in its sales mix. We expect the number to decline steadily from levels of around $1.25 per watt in 2016 to roughly $0.85 per watt in 2024, driven by falling component and installation costs as well as competitive pressures. However, if the company is able to maintain ASPs at levels of around $1.25 through the forecast period, it could result in an upside of about 10% to our current price estimate. On the other hand, if pricing were to fall to levels of under $0.60 per watt by 2023, on account of competitive pressures, this could result in a 10% downside to our current price estimate.

BUSINESS SUMMARY

SunPower is a manufacturer and distributor of silicon-based solar modules which are used to convert sunlight into electricity. The company produces solar power products for installation on residential and commercial units as well as large-scale, utility-sized projects. SunPower's solar modules have among the highest conversion efficiencies in the industry. The company also develops solar systems including rooftop- and ground-mounted solar systems. In 2011, Total S.A. of France acquired a majority stake in the firm.

We are modeling Non-GAAP revenue and cost metrics for SunPower, as U.S. GAAP defers revenues from transactions with the company's joint-venture yieldco, 8Point3 Energy Partners to the future.

SOURCES OF VALUE

We estimate that sales of modules and solar systems in the Americas account for most of the company's value. This is partially due to the following factors:

Increased utility-scale footprint

Solar cells manufactured by SunPower were historically used for installation on residential and commercial units. However, the company has been steadily increasing its presence in the utility-scale market, constructing some of the world's largest solar farms such as the 579 MW Solar Star project, helping to improve margins. Most of these higher-margin utility project sales are in the Americas.

Growth opportunity in rooftop solar

Rooftop solar is expected to be the fastest growing segment in the global power industry. According to Bloomberg New Energy Finance, rooftop solar will account for 20% of all gross electric capacity additions globally through the year 2020, outpacing other renewable energy sources including utility solar and wind energy. This is likely to be a net positive for SunPower, given that the company specializes in higher efficiency solar panels that are well suited for rooftop applications.

KEY TRENDS

Near-term challenges in the utility scale business

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 projects have trended upwards over the last few months, driven partly by the bankruptcy of project developer SunEdison in early 2016 .

Legislature and incentives to aid renewable energy projects

Governments all across the world have taken measures to encourage the use of solar technology as a way to help them remove their dependence on fossil fuels. For instance, in the United States, at the Federal level, the government offers incentives including an investment tax credit (ITC) of around 30% on the initial cost of a solar system. The credit, which was slated to decline from 2017, was extended by U.S. Congress in December 2015. That said, the 2016 U.S. Elections could have an impact on the policy landscape, potentially altering the country's environment and renewables agenda.

Emerging solar markets will account for bulk of future demand

China became the worlds largest solar market in 2013, overtaking Germany as the worlds largest solar market. The market is estimated to account for about half of global demand in 2017. Other emerging markets such as Latin America and the Middle East are also becoming important markets for solar power, given a combination of high electricity prices and strong consumption growth.

Changes to the project financing landscape

Financing for solar energy projects has been an issue in the past and developers have largely relied on complex tax equity investments or expensive bank debt to fund projects, as they have had difficulty tapping into cheaper sources of capital due to the lack of long-term data on solar power, and also due to the perception of solar as being risky and unproven. However, the decline in solar systems prices of late, as well as the improvements in panel technology, have brought about a greater acceptance of solar power and have made solar assets increasingly attractive. SunPower has been exploring various means to expand funding for its solar systems business. The company has also indicated in the past that it would issue solar asset-backed bonds. These moves could help the company reduce cost of capital and maximize value from its projects business.

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