Update SunPower (SPWRA)

11/15/2010 10:30 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

I’d say the actual dimensions of the positive surprise—13 cents a share—were less important than the gain in credibility that came for SunPower (SPWRA) with making third quarter numbers after the market close on November 11.

The company faced credibility issues after second quarter earnings missed estimates of a penny a share loss by a very large five cents a share. And the stakes have gotten much higher recently: The stock of the solar cell producer had climbed 40% from its August low. It didn’t help that the company’s guidance set an extraordinarily large range for earnings of between eight and fifteen cents on revenue of $450 million to $490 million.

(And speaking of credibility, the day after the earnings release, the company announced plans to sell about $320 million in euro-denominated bonds. Debt offerings for solar companies have been extremely rare and SunPower’s ability to get one done would be a sign of investor comfort with the company and the industry. )

Investors know that the company doesn’t bear total responsibility for that high degree of uncertainty. Much of it is a function of conditions in the solar cell market where orders and margins have become extremely unpredictable quarter to quarter as solar customers have struggled with uncertain financing and fast-changing national subsidy schemes.

So while in most circumstances company guidance that didn’t project an increase for the next quarter from the company’s prior figures might be considered disappointing news, in the case of SunPower such steady guidance is actually a relief. That’s especially true because the company’s year is so back loaded.

The company said that fourth quarter earnings per share will range from 95 cents to $1.15. (Yes, that’s right. After earning 26 cents in the recently concluded third quarter, SunPower will earn three times as much in the fourth quarter.) Wall Street had been projecting $1.10 a share. Revenue in the quarter will climb to $870 million to $970 million (up from revenue of $551 million in the third quarter.) Wall Street had been projecting $936 million.

The all-important gross margin number—all-important because Chinese solar companies are competing extremely aggressively on price and driving down margins at inefficient manufacturers—is projected by the company at 22% to 23% in the fourth quarter against 22.3% in the third quarter.

The steadiness of those margins is a sign that the company’s strategy of fending off low cost producers (or companies that sell at low costs even if they aren’t actually efficient manufacturers) by producing the most efficient solar cells is working reasonably well. In its earnings release the company noted that its solar cells have the highest efficiency in the industry at converting sunlight to electricity at 22%. The industry average is 14%, according to Briefing.com. Thin-film solar technologies come in at 11%.

That edge is especially important because the company expects that the cost per watt for solar power will drop to $1.71/watt in the fourth quarter and $1.48/watt by the end of 2011. That kind of cost reduction is crucial for the growth of the solar industry.

But it does guarantee that only the efficient will survive.

I wouldn’t rush to buy these shares because the uncertainty in the solar market in 2011 should provide a better buying opportunity not too far down the road. But I continue to like the long-term story here, which is why the stock is in my long-term Jubak’s 50 portfolio.          

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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