Is SunPower a Risky Investment?

With shares of SunPower Corporation (NASDAQ:SPWR) trading at around $11.45, is SPWR an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Many wise investors will begin reading this article, see it pertains to a solar company, and immediately think that the only correct position would be a short position. However, that’s not necessarily the case for SunPower. Are there negatives? Of course. These negatives include decreased average selling prices, increased competition, high costs, and substantial weakness in Europe, Africa and the Middle East. However, the list of positives is longer:

  • Strength in the residential and commercial markets
  • Increased consumer demand
  • Revenue growth
  • Strong performance in the Americas
  • Moderately strong performance in the Asia-Pacific
  • Gross margin increase
  • Positive earnings surprises in four consecutive quarters
  • Most efficient panels in market (residential)
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Up until this point, it looks as though SunPower would be the top option when it comes to solar. However, we should look at the numbers first. The chart below compares fundamentals for SunPower, Suntech Power Holdings (NYSE:STP), and First Solar (NASDAQ:FSLR). These three companies differ in size. SunPower has a market cap of $1.36 billion, Suntech has a market cap of $80.37 million, and First Solar has a market cap of $2.38 billion.

SunPower

Suntech Holdings

First Solar

Trailing P/E

N/A

N/A

N/A

Forward P/E

20.73

N/A

8.34

Profit Margin

-14.56%

-44.18%

-2.86%

ROE

-31.04%

-86.50%

-2.66%

Operating Cash Flow

 $28.90 Million

$215.50 Million

$762.21 Million

Dividend Yield

N/A

N/A

N/A

Short Position

25.20%

N/A

35.40%

 

The fundamentals don’t exactly inspire confidence, but let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for SunPower is weaker than the industry average of 0.40, but it still qualifies as normal. SunPower has much better debt management than Suntech. However, that’s not saying much. First Solar is clearly the most impressive in this area.

Debt-To-Equity

Cash

Long-Term Debt

SPWR

0.87

$457.49 Million

$865.55 Million

STP

2.82

$473.70 Million

$2.26 Billion

FSLR

0.16

$1.00 Billion

$563.04 Million

 

T = Technicals on the Stock Chart Are Strong

SunPower has outperformed Suntech and First Solar by colossal margins year-to-date. It has been easy to outperform Suntech considering that Suntech is on its last legs, but to dominate First Solar over the past several months is impressive.

1 Month

Year-To-Date

1 Year

3 Year

SunPower

-1.88%

103.90%

72.59%

-37.10%

Suntech Holdings

-69.33%

-72.33%

-86.12%

-97.00%

First Solar

1.44%

-11.10%

5.06%

-76.45%

 

At $11.45, SunPower is trading well above all its averages.

50-Day   SMA

10.33

100-Day   SMA

7.80

200-Day   SMA

6.19

 

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E = Earnings Have Been Unimpressive              

Revenue has consistently improved on an annual basis, but that doesn’t mean much if losses keep rolling in. Earnings have been on a roller coaster ride. SunPower must find a way to cut costs in order to improve in this area.

2008

2009

2010

2011

2012

Revenue ($) in billions

1.44

1.52

2.22

2.37

2.42

Diluted EPS ($)

-1.55

0.35

1.75

-6.28

-3.01

 

When we look at the last quarter on a year-over-year basis, we see a similar pattern, which is an increase in revenue and a decline in earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

625.28

494.13

595.90

648.95

678.52

Diluted   EPS ($)

-0.98

-0.67

-0.71

-0.41

-1.22

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

At the moment, the solar industry is suffering. Costs are too high, and there is a glut of solar panels on the market. That said, the potential is still high, and as long as a company can survive before it bleeds out financially, it will likely reap the benefits down the road. However, this might be a very long and winding road with lots of potholes, roadblocks, and construction.

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Conclusion

SunPower has enormous potential. If solar every takes off as many hope it will, then SunPower will be in a prime position. If the current economic environment could be classified as normal, then SunPower would be an easy OUTPERFORM. Unfortunately, that’s not the world we’re living in at the moment. SunPower might be a future winner, but this story is all about potential right now, not proven results. Therefore, SunPower is a WAIT AND SEE.

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