$SPWR Q2 Earnings Preview

by Enis July 31, 2013 10:48 am • Commentary

Event:  SPWR reports their fiscal Q2 earnings tonight after the close.  The options market is implying about a 14% one day move, which is below both the 4 qtr avg of about 10.5% and the 8 qtr avg of about 7%

Sentiment:  Wall Street analysts are actually bearish on the stock, with 6 Buys, 9 Holds and 3 Sell, despite the fact that SPWR has rallied from $5.62 at the end of 2012 to $27.50 today.  The 12 month price target is around $23.  Short Interest, which was only around 4 million shares to start the year, is at its highest level in 2 years, at almost 12 million shares.  That is around 30% of the stock’s float.

Here is the 3 year chart:

3 year chart of short interest in SPWR, Courtesy of Bloomberg
3 year chart of short interest in SPWR, Courtesy of Bloomberg

Options Open Interest:  Call open interest is more than twice put open interest, quite a skew that has persisted all year.  The lines with the most open interest are the Jan15 25 calls (10k, mostly purchased in May), the Jan14 27 calls, the Jan14 28 calls, and the Aug 20 puts.  Recent activity has also been skewed to calls by ratio of more than 2 to 1.

Price Action / Technicals:  The chart of SPWR tells the story of a euphoria that gripped the solar sector in 2007 and 2008, and then a spectacular crash, but a more recent revival after being left for dead for many years.  We’ll get into the fundamentals underlying those moves in a moment, but let’s simply start with a weekly chart since the IPO:

Weekly chart of SPWR since 2005 IPO, Courtesy of Bloomberg
Weekly chart of SPWR since 2005 IPO, Courtesy of Bloomberg

The stock had been a serious market laggard from 2009 to 2012, and is still only back to 2009 levels after its huge run this year.  Importantly though, it is above its 2011 highs that were in the low 20’s.

Zooming in to the 1 year chart, we can see the very strong participation on each upside thrust on the volume on the lower panel:

1 year daily chart of SPWR, 50 day ma in pink, volume lower panel, Courtesy of Bloomberg
1 year daily chart of SPWR, 50 day ma in pink, volume lower panel, Courtesy of Bloomberg

I’ve circled in green the three important thrusts higher in the first half of 2013 that were all supported by large volume.  That adds credence to the long-term trend higher, though the most recent short-term thrust has been on weaker volume.  The rising 50 day ma in pink comes in around 22, near the May highs.

Fundamentals:  While SPWR is only a $3 billion market cap, this is a complicated balance sheet with many moving parts to its business.  The real story for the company goes like this – after its IPO, it was viewed as right in the middle of the red-hot solar industry’s growth, particularly on the manufacturing side, focusing on solar cells and modules (using silicon).  Back then, the focus of SPWR was as a manufacturing company, and government incentives globally (particularly in Europe) caused a huge increase in global solar cell and parts production from 2005-2008.

However, all of that production resulted in overcapacity, especially since most solar parts are commodity products.  Prices and demand collapsed in the aftermath of the financial crisis, with Chinese manufacturers flooding the market with their capacity as well.  SPWR stock went from $100 to $20 in short order.

The problems, though, didn’t stop there.  European government incentives were rapidly ratcheted down from 2009 to 2012, as solar subsidies were cut as part of austerity programs.  Add to that the already depressed solar market, and solar manufacturers, including SPWR (low for stock in 2012 was $3.71), were at serious risk of bankruptcy.  Many Chinese manufacturers did in fact go out of business.

SPWR’s saving grace has been its U.S. business.  SPWR has drastically reduced its exposure to Europe as part of its restructuring program given the reduced government incentives.  More importantly, it has increasingly focused on the full service utility-scale business in the U.S., as well as the nascent servicing business in residential and commercial.  It has reduced its overall manufacturing capacity and tailored the business to meet the needs of U.S. residential, commercial, and utility solar projects.

Here is a look at the major revenue shift in the past year out of Europe and into the U.S. (from last quarter’s earnings release):

Three Months Ended
March 31, 2013
April 1, 2012
Revenue by region (in thousands):
Americas (as reviewed by CODM)
Utility and power plant projects
EMEA (as reviewed by CODM)

The solar industry in the U.S. is on much more sustainable footing, as long-term customer leases combined with government tariffs make solar competitive with traditional electricity in a variety of states.  So SPWR is well positioned going forward after its painful restructuring over the past 3 years, particularly since it’s one of the few full-service solar companies that is vertically integrated (meaning it manufactures its own parts as well).

The real issue is, what’s the appropriate value for this company?  GAAP EPS is expected to be 0.14 in 2013, 0.58 in 2014, and 0.93 in 2015, so the company is valued at about 30x its 2015 EPS.  But if long-term growth trends hold for the industry, the company could be growing earnings 50%+ for the next 5 years.  That’s why the positive news on the restructuring side in February and May caused such big moves higher in SPWR stock.  The balance sheet is much cleaner, the company has re-focused its business, and overall industry trends have improved.

Volatility:   IV is up into the event but not as high as it’s been i the past. Aug vol is about 90 and Sept about 75. Those are likely to be around 60 tomorrow morning:

Screen Shot 2013-07-31 at 8.39.04 AM
from LiveVol Pro

My View:   I am a long-term bull on the solar industry.  Specifically, I’ve been more interested in the servicing side of the business rather than the manufacturing segment.  Manufacturing still has significant overcapacity, and is in many cases a commodity businesses.  But that has helped to bring solar costs down quite a bit over the past 3 years, making solar much more competitive vs. traditional electricity.  That’s a positive going forward.

SPWR has shifted its business more towards long-run service contracts and away from simple manufacturing.  Investors have been rewarded in the past 6 months as a result of that shift.  I like this company’s prospects quite a bit looking out 5 years.  Given its recent volatility, I’m much more hesitant to touch it ahead of earnings.