Investors continue to show their ambivalence about solar power
stocks, as every fresh quarterly report is met with a fresh round
of aggressive buying or selling, Simply put, these companies are
neither as good nor as bad as their quarterly reports imply.
Instead, these reports highlight that the industry is going through
myriad growing pains and will be unlikely to exhibit its true
earnings potential for a few more years. So any time one of these
names sells off on tepid quarterly results, you may want to dig in
to assess whether the long-term outlook remains on track.
SunPower (Nadsaq: SPWRA)
is often cited as one of the best sector plays as the company
possesses a solid technology base, a blue-chip customer list and
eventually, ample manufacturing capacity. Over time, that should
translate into solid sales and profit growth - but not yet.
On Tuesday evening, Sunpower showed some more growing pains, and
investors are punishing the stock to the tune of an -8% drop.
Sunpower is seeing ample demand - perhaps too much in the face of
its still-growing capacity. The company scrambled to meet demand
for its solar power panels, which led to a spike in costs. As a
result, per-share profits were disappointing. Not a bad problem to
have, but a problem nonetheless.
Sunpower's primary focus is on large installations, such as on the
stores. And based on its technology roadmap, the company's
competitive position should only get stronger in this market.
That's because Sunpower's solar power panels will soon convert 23%
of the sun's energy into electricity, which is roughly 20% to 30%
better than past energy conversion ratios. That means customers
will reap an even greater payback on their investment, and reduce
the break-even time on what is a costly investment.
Shares of Sunpower are more than -50% off of their 52-week high as
investors grow frustrated with the company's bumpy profit growth.
Indeed 2010 and 2011 consensus profit forecasts have come down a
good bit in recent months as investors anticipate temporary margin
pressures. Their impatience could spell opportunity for you.
Company Name (Ticker)
|Sunpower (Nasdaq: SPWRA)
|Electronic Arts (Nasdaq:
|*Based on consenus estimates
prior to recent earnings release
Every quarterly press release is peppered with bullish
pronouncements as management plays up the most appealing financial
metrics form the just-completed quarter. Bad news gets buried in
the data, but investors are not easily duped. That's why they're
selling shares of
this morning. When the office equipment supplier announced robust
quarterly results on Tuesday evening, it played down the fact that
gross margins fell all the way to 13.8% -- a record low for the
company. Those weak margins led to a $0.09 earnings-per-share
shortfall from the $0.40 consensus, good enough for a -9% drop in
the stock in Wednesday trading.
The weak margins highlight a real concern for distribution
businesses like this. Sales may grow at an impressive rate, but
competition is so intense that it becomes harder and harder to
boost the bottom line . While analysts had hoped per-share profits
would grow from the $1.25 to $1.40 pace registered in the last two
years to around $1.75 this year, this morning's report indicates
that profits probably won't grow at all. Today's sell-off only
begins to incorporate that downbeat view. Shares, which still trade
for around 13 times the likely 2010 profit forecast, could sell
down to a price-to-earnings ratio (P/E) of 10 once investors fully
grasp the lack of organic profit growth in this business model
We recently noted the brightening outlook for
Electronics Arts (
. Yet even as the video games maker posted solid fiscal
fourth-quarter results Tuesday evening, it cautioned that
first-quarter results may be weaker than analysts anticipate. And
that's pushing shares down nearly -6% this morning.
But the tepid forecast looks more like a case of conservatism than
anything else. After all, this management team had lost credibility
in the past trying to predict an upturn. This time around, they may
prefer to keep expectations low. Yet as you run through the
company's conference call, you hear of many data points that show
it is back on track, developing fewer -- but more-focused --
titles. The company's recently-released slate of new games is
selling quite well, and some near-term launches are generating
solid advance buzz. Today's sell-off may create an entry point for
investors who have the patience to see a turnaround slowly
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.