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SunPower Likely To See A Massive Jump In Earnings And Book Value With 8point3 IPO

May. 1, 2015 8:32 AM • spwr

  • SunPower earnings came in line with expectations but are largely meaningless in the context of the YieldCo.
  • The 8point3 YieldCo should result in a large one time gain and a big increase in book value of SunPower.
  • We expect SunPower to outperform going into the YieldCo IPO but prefer some its peers in terms of longer term potential.

Capacity limited SunPower (NASDAQ:SPWR ) has been reporting unremarkable quarters in the recent past. SunPower's capacity constraints (see image below) and high cost structure continue to hamper the Company's growth in the near term.

Looking in to Q1 results. the Company's revenue, at $430M came within the guidance of $410 to $460M and gross margin came in at 20.6%, above the guidance range of 18 to 20%. The revenue is a steep drop off from Q4 2014 levels as well as Q1 2014 levels.

The reduction in the numbers has to do with the Company increasing its HoldCo allocations in anticipation of the 8point3 YieldCo it is launching with First Solar (NASDAQ:FSLR ). Recently filed S-1 for 8point3 Energy partners shows in detail the projects that SunPower intends to transfer to the YieldCo in the near future.

In the context of the YieldCo, the quarterly results are unremarkable and not a very meaningful indicator of the Company's future.

Given the numbers do not tell much of a story, our focus is on the Company's execution on the technology and manufacturing front. The key notes from the Company's earnings call are as follows:

- The Company's progress in adopting and integrating SolarBridge technology into SunPower panels seems to be on track with the Company claiming production shipments of integrated modules in the quarter

- The Company's progress on Fab 4, appears to be slightly ahead of targets with the Company claiming higher than expected efficiencies in pilot production.

- The Company's cost reduction plans and targets are critical for the Company's future success but the Company does not provide much visibility in to this aspect

- The Company's progress on C7 concentrator technology appears to be progressing well with increasing

success in the China market.

The big news for SunPower, however, has to do with the YieldCo the Company announced in partnership with First Solar. YieldCos can be particularly attractive for speculative, high friction DG projects. With reduced fiction and acting as a ready buyer, YieldCos can substantially increase the value and velocity of solar installations at SunPower.

Unlike SunEdison (NYSE:SUNE ) and NRG Energy (NYSE:NRG ), SunPower will not be consolidating the YieldCo results into financials. Which means is that when SunPower sells a project to 8point3, the Company will recognize revenue and margin for the sale but will defer a portion of margin equal to its ownership stake in the YieldCo. This deferred margin will be recognized through the Company's equity income line over the life of the project as SunPower's ownership stake in 8point3 declines over time.

This treatment allows SunPower to benefit from the project sale to 8point3 immediately in terms of EBITDA and leaves a residual long-term income stream. While this mechanism will understate the Company's EBITDA in the short term, it gives a far better visibility into the Company's earnings stream than its YieldCo peers.

This accounting treatment implies that SunPower is likely to post large onetime gains in Q2 (or Q3) coincident with the IPO. This will have an impact of dramatically improving the book value on the Company and will likely lead to valuation expansion in the near term.

Th3 8point3 YieldCo will also let SunPower more efficiently monetize its project in the future. With the benefit of the YieldCo, we expect SunPower to outperform going into the 8point3 IPO.

However, in light of the Company's diminishing efficiency advantage and limited manufacturing potential, we believe the Company's growth in 2015 compared to its peers is likely to be subpar. While the Company is likely to outperform the general market due to the strong solar growth cycle, we view several of SunPower's peers as much better solar investment choices for 2015.

Our Sentiment: Hold

Disclosure: The author is long SUNE, FSLR.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Category: Forex

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