Bear of the Day: SunPower Inc. (SPWR)

In late 2015, the U.S. government extended the Solar Investment Tax Credit (ITC) thought 2021, much later than the initial expiration date of December 31, 2016. While this was helpful for companies planning big solar projects, it negatively impacted some solar producers. The producers were expecting large projects to be completed in 2016, but with the extension many companies pushed back their solar plans. This negatively impacted SunPower Corp ( SPWR ), who is our Zacks Bear of the Day.

This Zacks Rank #5 (Strong Sell) company designs and manufactures high-efficiency silicon solar cells and solar panels based on an all-back contact cell design. SunPower's solar cells and panels generate electricity from sunlight for residential, commercial and remote power applications. Its proprietary all back contact silicon solar cell technology produces more power per square foot compared to conventional solar cells.

Recent Earnings Results

SunPower reported Q2 16 earnings last week, and they came in below the Zacks Consensus Earnings estimate. The company saw year over year declines in gross margins (fell from +18.6% to +9.8%), GAAP net loss (earned $6.5 million in Q2 15, posted net loss of $70 million in Q2 16), Non-GAAP net income (earned of $27.2 million in Q2 15, posted net loss of $30.1 million in Q2 16), and EBITDA fell by -53%.

Due to the limited completed projects in the second half of 2016, management reduced revenue, and EBITDA expectations for Q3 16, and FY 16. Q3 revenues (Non-GAAP) were guided down to a range of $700-800 million (below the expected $1.35 billion), and EBITDA was lowered from $180 million to a range of $115-140 million. FY 16 Non-GAAP revenues were cut from a range between $3.2-3.4 billion to a range between $3.0-3.2 billion, and EBITDA estimates were lowered from a range between $450-500 million to a range between $275-325 million.

Management's Take

According to Tom Werner, President and CEO, " However, while the long-term fundamentals for solar power remain strong, we see a number of near-term industry challenges, primarily in our power plant segment, that we expect to impact our business and financial performance in the second half of 2016. The extension of the Investment Tax Credit, as well as the bonus depreciation credit, while beneficial to the long-term health of the industry, has reduced the urgency to complete new solar projects by the end of 2016, with many customers adopting a longer-term timeline for project completion. Additionally, near-term economic returns have deteriorated due to aggressive PPA pricing by new market entrants, including a number of large, global independent power companies. We are also seeing customer project IRRs rising in the near term as buyers have increased their hurdle rates due to industry conditions. Finally, the continued market disruption in the YieldCo environment has impacted our assumptions related to monetizing deferred profits ."

Price and Earnings Consensus Graph

As you can see in the graph below, the company's stock price and future earnings expectations have fallen off the table for 2016, and 2017.

SUNPOWER CORP-A Price and Consensus

SUNPOWER CORP-A Price and Consensus | SUNPOWER CORP-A Quote

Decreasing Estimates

Due to the poor earnings results and subsequent reduction in guidance, earnings estimates for Q3 16, Q4 16, FY 16 and FY 17 have all seen significant downgrades over the past 7 days; Q3 16 fell from $0.90 to $0.67, Q4 16 crashed from $1.45 to $0.16, FY 16 plummeted from $1.65 to -$0.06, and FY 17 collapsed from $2.05 to -$0.31.

Bottom Line

While the extension of the ITC is beneficial for the solar segment in the long-run, it will have some negative impacts in the near and mid-term. These negative impacts will hurt SunPower's top and bottom lines in the second half of 2016, and into the early parts of 2017.

If you are inclined to invest in the Solar segment we would suggest looking into Sunrun Inc. ( RUN ) who currently carries a Zacks Rank of #1 (Strong Buy) and or Vivint Solar ( VSLR ) who currently carries a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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