So, what exactly is involved in calculating solar panels cost in Liberty Station? When thinking about solar power very few people know the way the cost of solar panel systems is actually measured. Or even, for that matter, do we automatically grasp the connection relating to the cost of solar power and the value of solar power. We all know that gasoline prices are in dollars per gallon. We likewise are all aware of approximately how far we’ll be able to drive after spending 40 bucks for a tank of gas. In contrast to a tank of gas, the value of which can be consumed pretty much instantly, solar panels deliver their value across a period of time.
Liberty Station 3 Undervalued Solar Leaders
SolarCity Stock Should Continue to Rise As Solar Becomes More Affordable
Energy is one of the world's largest sectors in the market; therefore energy stocks comprise a large amount of the portfolios of institutional and individual investors. Oil, of course, is the largest in the energy sector at roughly 36%, followed by natural gas at 24%. Interestingly one of the most talked about sources of energy, solar energy, still only comprises one quarter of one percent of today's energy supply. However those numbers should shift upward over the next decade as witnessed by last year's 86% growth in the solar industry. In the U.S, solar energy consumption grew by nearly 34% reaching 0.212 quadrillion Btu. Bloomberg New Energy Finance predicts that solar will gain 24%, second largest share of new power capacity behind wind power, added in terms of GW by 2030.
Though the "green" movement does play a role to some extent, what may actually be driving the shift toward solar energy in residential and commercial buildings may be simple economics. People want to use cleaner energy to run their houses or businesses, but most are not willing to spend the extra money, or simply do not have the financial means to pay the extra costs to convert to solar. In 2005, solar panels typically cost $3.50 per watt of power, however, by 2012 prices had tumbled to 75 cents a watt, and some experts predict the prices will continue to fall, making it more cost effective for the consumer to have installed on their home or business.
But buying and installing solar panels is still costly, and could take upwards of twenty, for solar to pay for it. That's why the biggest shift in solar has come from companies leasing the panels to the customer and selling them the electricity at a reduced price compared to what the utility companies charge. It appears to be a win - win situation; as the industry has appeared to overcome a major obstacle eliminating the large upfront costs, and the solar company that leased and installed the panels makes money selling back the energy to the customer. For that reason, I believe the money to be made by the investors might be better placed in companies that buy the panels and install them, then have the customers lease them, thus making it affordable to the consumer.
That is what SolarCity (SCTY), a San Mateo CA company does. SolarCity designs, installs and sells or leases solar energy systems to residential and commercial customers, then sells the electricity generated by the solar energy systems back to customer at 10% to 20% less than the utility companies. And its business model appears to have attracted plenty of investors, as witnessed by the stocks run-up of over 250% since its December 2012 public offering.
In June, SolarCity announced the launch of a Zero-Down solar financing program for the home building industry, giving builders the opportunity to offer solar in new residential communities without the builder or the new homeowner incurring any upfront costs. In the first five months of 2013, the total kilowatts [KW] of SolarCity's installations for new home builder construction grew by more than 300% compared to the same period the previous year. Through its Homebuilder Partner Program, SolarCity has formed partnerships with over 30 national and regional home builders in 125 communities across the U.S.
According to Walter Cuculic, SolarCity's national manager of Builder Programs:
Home builders today are investing heavily in adopting green construction practices and solar is a linchpin in the success of a modern, energy efficient home. SolarCity's full-service offering and our new Zero-Down financing option helps home builders meet their aggressive construction timelines and stay within their budgets, and solar will save money for the homebuyer on their energy bills for years to come.
The company's initiative, where it plans to build more than $1 billion in solar projects to provide power to up to 120,000 military homes in the United States, continues to show success. On July 23rd SolarCity announced plans to add 12.8 megawatts of new solar generation capacity for up to 7,500 military homes at Lend Lease-managed Island Palm Communities throughout the island of Oahu. SolarStrong projects are already underway at nine other military bases throughout the U.S.
SolarCity was chosen by Wal-Mart Stores, Inc. (NYSE:WMT) to install solar panels in 60 stores in California. SolarCity will own and maintain the solar power systems, and has added more than 500 new full-time employees since it initiated its first Wal-Mart solar project, and expects to hire hundreds more employees before year's end. Wal-Mart's solar power initiative will total more than 130 stores by the close of 2013.
Mack Wyckoff, senior manager of renewable energy at Wal-Mart, commented on the solar project:
Our solar efforts in California have proven to be a great way for Wal-Mart to build our renewable energy program. We are confident that we will continue to grow our solar energy program in the U.S. and around the world because of the initial success we have had in California.
While the business model and growth all sound positive, and SolarCity, which has a $3.12 billion market capitalization, has seen its customer base rise 106% year-over-year to over 57,400 and though the company increased its long-term contracted cash flow to $1.22 billion, it has yet to turn a profit. The reason is that though leasing the solar panels has shown to be the most successful method to attract clients, the long term leasing model requires upfront costs for the panels and the instillation, thus the company does not see any profits until the customer base expands enough to produce offsetting lease income. However, with panel prices continuing to drop, the company's upfront costs will drop as well. According to Kevin Landis, manager of the Firsthand Alternative Energy fund, in reference to SolarCity's business model:
When the price of panels goes down, their business gets better. The sweet spot is buying the panels and owning the output.
SolarCity stock closed on Wed. July 31 at $41.35 per share. For the first quarter of 2013, core operating lease revenue rose 85% to $15.1 million compared to $8.1 million in the first quarter of 2012. Total revenue grew 21% year-over-year to $30.0 million. Gross Profit rose 25% to $12.7 million, up from $10.1 million in the first quarter of 2012. Total operating expenses, however, rose $34.5 million in the first quarter compared to $24.7 million in the first quarter of 2012, due in part to the continued investments in development capabilities. For the second quarter 2013, SolarCity expects operating lease revenue to come in be between $16 million - $18 million, with solar energy systems sale revenue between $5 million - $10 million, and an operating expenses to be between $38 million - $42 million.
SolarCity does have its competitors like the larger SunPower (NASDAQ:SPWR), a high quality solar panel producer based in San Jose, CA, that designs, manufactures and delivers solar panels and systems to residential, business, government and utility customers. SunPower has also built its leasing business to be the largest U.S. both residential and commercial, and globally the company has installed over 100,000 residential systems. Shares of SunPower have had an amazing run year to date, up 391%. After hours on July 31st, the company reported net income for the second quarter of $19.6 million or $0.15 per share, compared to a net loss of $84.2 million or $$0.71 per share for the same quarter last year. SunPower forecasts for the third quarter adjusted revenue of $550 million to $600 million and adjusted earnings of $0.15 to $0.35 per share. For fiscal 2013 the company expects adjusted revenue of $2.5 billion to $2.6 billion and raised its adjusted earnings from $0.60 to $0.80 per share to $1.00 to $1.30 per share. On August 1st, shares of SunPower dropped 10% on high volume to $25.20 in mid-day trading.
Solar power in residential and commercial is clearly on the rise with plenty of room to grow. Interestingly, what might accelerate the growth is that instructional investors have not gobbled up solar company shares; roughly 20% of SunPower shares are held by institutional investors, and only 17% of SolarCity is owned by institutional investors.
While I think both SolarCity and SunPower have the potential to continue to see their stocks rise significantly in the next few years, what I like about SolarCity is that it does not manufacture the solar panels, so it does not have to compete with the Chinese manufacturers. SolarCity focuses primarily on the design, installation, the finance and the management of the system. Though with the high run up on both companies, I would like to see the stocks dip on some profit taking for a better entry price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
SolarCity's Stock Should Continue To Rise As Solar Becomes More Affordable - Tesla Motors (NASDAQ:TSLA)
SunPower Corporation (NASDAQ:SPWR) is a global solar energy solutions provider. It operates in the specialized semiconductor industry and was incorporated in 1985. It is headquartered in San Jose, California and has offices in North America, Europe, Africa and Asia. The company's operating activities include designing, manufacturing and supplying solar panels and solar systems to a wide range of clients. SunPower's customers range from residential to utility customers, including businesses and the government. The company also offers different products related to solar systems that include inverters and control chargers. SunPower Corporation reports its revenues based on geographical segmentation. The company generates about 70% of its revenue from America, 20% from EMEA (Europe) and 10% from APAC (Asia Pacific). The revenues from Europe and Asia have been decreasing over the years partly because of the growing American demand and partly because of the recent economic conditions of Europe. NRG Solar is a significant customer of the company, being responsible for 35% of the revenue generated from America or in aggregate terms 24.5% of the entire revenue. SunPower is backed by Total S. A., the fifth largest publicly-traded energy company in the world. Total has a controlling interest in the company and holds around 66% shares of SunPower.
SunPower Corporation is listed on NASDAQ and is currently trading around $30. 2013 proved to be a good year for the company as far as market performance is concerned. Shares of the company appreciated consistently during the year. In the first week of January, shares were trading at around $6 but now they are touching $30. The solar industry has been facing difficulty in the past two years but now it seems that the market is regaining confidence in the solar industry.
EPS of the company also improved during 2013 which caused the share price to increase. Revenues have also been improving over time and SunPower has posted a CAGR (compound annual growth rate) of 4.95% since December 2011. These growing financial figures were responsible for the positive trend of the share price.
It appears that the solar industry is starting to recover. The recent years have been rough, especially for American solar businesses because of the dumping exercises carried out by China. The subsidizing of solar companies by the government of China enabled them to sell below their production costs. This forced the American companies to cut prices and suffer losses. Oversupply in the industry was also a major factor in the reduction of prices and diminished earnings. The sales of Chinese solar firms in Europe are capped now due to limitations imposed by the European Union. Once the US and Europe have settled the Chinese solar panel issue, profits in the industry will begin to grow. Furthermore, China has banned the construction of any further solar panel factories. All these developments enhanced the investor's confidence in the solar industry which in turn is reflected in the market performance of the American solar companies. "We're at a point now where demand starts to be driven by cold, hard economics rather than by subsidies and that is a game changer," says Jason Channell of Citigroup.
The solar industry is poised for future growth. According to IEA, renewable electricity will surpass output from natural gas and double the generation from nuclear plants by 2016; becoming the second most important source of energy after coal. It is worth noting that the growth of renewable energy has always been underestimated in projections. For instance, in 2003, IEA predicted that non-hydro renewable energy would represent 4% of the global generation by 2030 but the industry reached that figure in 2003. According to BNEF, renewable energy will account for around 69-74% of new capacity added by 2030. Estimates by HIS predict the global PV (photovoltaic) market to grow by 17% in 2014. All of this points toward the fact that the solar industry will grow in the future.
BNEF also projects a 20% increase in PV installations by 2017. The emerging markets are USA, China and Japan, accounting for 52% of the solar demand in 2013 compared to 13% in 2008. Overall, the industry is set for growth but the question is, on whose expense? China and the US are the two main competitors in this industry. The relative strategies and actions of their governments could affect the companies based in both countries.
Global Production Leader
China is the largest supplier of PV modules. It plans to add 10 GW of solar capacity to the system each year until 2015, aiming for 35GW by 2015. The current capacity is 5GW. Chinese companies like Trina Solar, Yingli Solar and Hanergy have low production costs and are offered subsidies by the government. Therefore, they manage to compete on very low costs, rendering the US based suppliers unprofitable.
The excess production and oversupply of solar panels by Chinese manufacturers reduced the price margins in the industry. This oversupply has been adversely affecting the global solar industry for the past few years. The capping of Chinese solar panels by the EU and the restriction of the Chinese government on the establishment of new solar panel installations has helped in improving the conditions of the industry globally. This, however, presents a problem for the American solar companies because the Chinese suppliers are likely to converge upon the attractive US market. This development could pose a serious hindrance to the growth of US based companies. China still produces the cheapest cells and the efficiency of the cells is also competitive. American companies need to find a way to produce cost effective cells to counter China's competitive advantage. To encourage competition, The U.S. Commerce Department set anti-dumping duties ranging from 18.32% to 249.96% on solar-energy cells imported from China in 2012. This provides a level playing field as far as the American market is concerned. In Europe, the market is equally competitive for both US and Chinese firms because China's sales have been capped. In Asia, as expected, Chinese companies have a clear advantage over their American counterparts.
Residential Leasing Program
SunPower's leasing program is a competitive advantage for the company, as it allows the consumers to install their energy systems without paying all charges upfront. Consumers can save up to 10% or 15% on their electricity bill and be eco-friendly at the same time. SunPower is trying to bridge the gap further by lowering the costs of the system and improving the efficiency. It is aiming to enhance efficiency by 10% and reduce panel costs by 35% in 2015. The residential lease program has attracted 16,200 customers since 2012. "Our residential lease business remains strong, with demand outstripping our financial capacity in the first quarter," said Tom Werner, SunPower's CEO, during a call with analysts to discuss quarterly earnings. The company has been fuelling its finance requirements from Citi, Credit Suisse and recently from US Bancorp. These leases are a competitive advantage for SunPower because they help in reducing the overall energy costs of the consumer.
Maxeon cells that are being manufactured by SunPower are the most efficient cells to date. They are 24% efficient. Provided the company manages to reduce the production cost of the cell, they would be every one's first choice.
SunPower's Oasis C7 is a solar photovoltaic tracking system that concentrates the sun's power seven times to achieve the lowest levelized cost of electricity (LCOE) for utility-scale solar power plants.
The leading technologies offered by SunPower are its differentiated strength and can help the company to grow.
Research and Development
SunPower is involved in research with King Abdullah University and the French Laboratory of Interfaces of Physics and Thin Films. Total S. A. is also working in solar R&D which could also benefit SunPower. Total is working in collaboration with:
LAAS: (Laboratory for Systems Analysis and Architecture - Toulouse, France) to enhance the efficiency of photovoltaic modules using a systemic approach.
IMEC: (Interuniversity Micro Electronics Center - Louvain, Belgium) to decrease the amount of silicon needed for cells and improve their efficiency
LPICM: (Interface and Thin Film Physics Laboratory - Saclay, France), a joint research facility of the French National Center for Scientific Research (CNRS) and the Ecole Polytechnique's engineering school with a combined team working on crystalline silicon thin film technology.
SunPower's exposure to extensive R&D is reflected in its technologically advanced products.
P/E ratio of the company stands at 26.8x and PEG ratio at 0.76x. This indicates that the company's growth would be higher than what market is paying for a dollar of earnings. In simple terms, the market perception is not in line with future growth and we can say that the price is not perfectly correlated to the anticipated growth. Industry growth estimates are 17.09% but the street expects SunPower to grow by a staggering 30%.
With growth estimated at 30% for the next 5 years the multiplier to value the company should be higher than its P/E. That is why we are taking a relatively higher multiplier of 35x.
The mean price target is $35.7, using an average multiplier of 30x which is also above the current price. However, we will use a higher multiplier of 35x and a target price of $42. These estimates give us a 25% upside on SunPower.
SunPower Corp. is well-positioned in the solar industry. It has highly advanced and differentiated products, which, despite their high costs are capable of competing with the low cost and less efficient solar modules. With its intense exposure to R&D, we believe that the company will be able to compete on the cost basis in the near future. It has the potential to become the leader in the solar industry. With the anti-dumping legislation enacted in the US, cap on China's sales in the EU and plans to initiate global leasing, SunPower has an opportunity to penetrate these markets. The top quality cells, Maxeon, enable the company to compete with other American counterparts like First Solar. As far as Asia is concerned, the market will continue to be influenced by China until the solar giants of America can develop a cost effective solution.
Overall, the future of SunPower Corp. is bright whether fueled by their differentiated technology or by the backing of Total S A. The target price of the company indicates further price growth. So, our call on the shares of SPWR is a BUY.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.