SunPower Corporation (SPWR), First Solar, Inc. (FSLR): The Only Solar Company to Buy

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Over the past three months, share outperformance for solar companies has been electrifying; the group is up 85% as compared to S&P 500 rising only 5%. Shares of these companies have been benefiting from improved near-term demand in Europe, Japan and North America, stable module and polysilicon pricing, China’s growing support for domestic solar demand and supply chain consolidation.

However, ahead of the earnings, the question remains: Will these shares soar even higher? Let’s have a look at some of them.

What caused a sharp fall in SunPower’s stock?

SunPower Corporation (NASDAQ:SPWR) shares rose up to 5% in the pre-market after the company announced earnings results that topped the Street’s estimates for the EPS figure. However, the shares saw a sharp reversal as the company announced light revenue figures.

SunPower Corporation (NASDAQ:SPWR)The company announced Q2 revenue of $576 million, which came in short of the estimated $580 million figure. Not only this, some cautious comments from the Street sparked a sell-off in the stock (the shares have been down almost 15% since the earnings). Goldman Sachs Group, Inc. (NYSE:GS) commented that a premium valuation and softening earnings growth suggest headwinds to further upside. Those who haven’t been following this company do not know that the stock has appreciated more than 300% for the year!

There is no doubt that there are a lot of positives for the company: Strengthening performance in North America and the EMEA (Europe, Middle East and Asia) region, a significant volume ramp-up in AVSP (Antelope Valley Solar Project) into 2H13 and growth in the United States in the solar-leasing field. However, that said, the stock’s outsized gains compel me to believe that many of the positives are already baked in the stock.

Is Credit Suisse right about this company?

On Aug. 1, after SunPower Corporation (NASDAQ:SPWR)’s announcement of results, Credit Suisse Group AG (ADR) (NYSE:CS) issued a note in which it raised concerns about First Solar, Inc. (NASDAQ:FSLR)’s performance in the second quarter of the year. Credit Suisse believes that new utility-scale projects are likely to have lower margins than the current pipeline.

Apprehension by the Street over First Solar, Inc. (NASDAQ:FSLR)’s quarterly results is justified to a certain extent. The main culprit has been the project delays in the company’s premium ABW project. The ABW power plant has come out as a product of First Solar’s partnership with Alterra Power, a diversified renewable-power generation company. The closure of the ABW project has been pushed back due to delays in the permitting process in April.

Additionally, book-to-bill is expected to dip below 1:1, as no new projects were announced this quarter on top of the 2.5GW backlog at the end of 1Q13. Given the management’s target for hitting a >1:1 ratio exiting 2013, visibility into the bookings of future projects (for example, the recently disclosed $370 million, 162MW project in Chile, which is currently in permitting) is the key.

The company is expected to announce its earnings on Aug. 6. Key issues to listen for in the conference call are:

  • backlog and pipeline issues
  • strategic update with respect to use of recently raised $400 million+ of capital
  • potential for alternative solar financing and/or asset monetization
  • update on emerging market opportunities, including proposed Chile project

The stock has been up 54% since the start of the year and a mammoth 204% in the last 12 months. Despite that, the stock is trading at a forward multiple of just 14x, much lower than 26x of SunPower Corporation (NASDAQ:SPWR)’s. However, attractive valuations shouldn’t trick investors, as the company faces headwinds in the form of delays in premium projects.

Expect solid 2013 guidance from this company

SunEdison Inc (NYSE:SUNE) is expected to report its earnings on Aug. 7. The Street expects the company to announce revenue of $452 million and a loss per share of $0.13. The company is expected to produce revenue of $245 million from its semiconductor segment. The other segment, which deals with solar energy, is expected to display revenue of $262 million.

However, it is rather the third-quarter expectations (next quarter) that have sent waves of excitement among investor circles. The Street expects the company to announce revenue/EPS of $723 million/$0.06, respectively. However, Goldman thinks even more positively about the company. The sell-side firm has placed this company on its conviction buy list. Goldman believes that the company will easily beat the consensus estimates.

The beat is expected to be driven by higher-than-expected margins in its US and Canadian projects. These high-margin projects currently constitute around 72% of Sunedison Inc (NYSE:SUNE)’s near-term backlog. The margins are expected to be in low 20’s (the company had 10% to 15% margins in the first half of the year.)

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