It's Not the Earnings Surprise That Counts

11/15/2010 3:20 pm EST


Jim Jubak

Founder and Editor,

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

The company missed its second-quarter estimates of a penny-a-share loss by a very large five cents a share, and the stakes have only gotten higher as shares in the solar-cell producer climbed 40% from their August low. It didn’t help that the company’s guidance set an extraordinarily large range for earnings of between eight and 15 cents on revenue of $450 million to $490 million.

Investors know that the company doesn’t bear total responsibility for that high degree of uncertainty. Orders and margins in the solar-cell market have become extremely unpredictable as customers have struggled with uncertain financing and fast-changing national subsidy schemes.

So while in most circumstances, guidance that didn’t project an increase for the next quarter 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. That’s right: After earning 26 cents in the recently concluded third quarter, SunPower will earn three times as much in the fourth. Wall Street had been projecting $1.10 a share. Revenue will climb to $870 million to $970 million (up from $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 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 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 in the fourth quarter and $1.48 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.

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.

I continue to like the long-term story here, which is why the stock is in my long-term Jubak Picks 50 portfolio. But if you don’t now own these shares or would like to add to a position, I wouldn’t rush to buy these shares. The uncertainty in the solar market in 2011 should provide a better buying opportunity not too far down the road.

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 here.

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