Does SolarCity Run a Capital Efficient Operation?

by Debra Fiakas CFA

The last post “SolarCity’s Investor Disconnect” visited the oft repeated flogging of a company missing consensus estimates.  SolarCity (SCTY:  Nasdaq) reported strong sales growth in the December 2012 quarter, but the net loss was far deeper than expected  –  at least as suggested by published consensus estimates.  Investors immediately held the company accountable for the miss.  A closer look at the consensus reveals it is there is a great deal of disagreement on SolarCity’s fortunes.

We can debate whether a company should be measured against a shakey consensus earnings estimate.  However, that would be a waste of time.  Since the stock has been trimmed back, it makes more sense to figure out whether there is anything happening at the solar panel installer that makes sensible a contrarian, long position.

Along with top- and bottom-lines, SolarCity reported a string of accomplishments in the year 2012.  The customer base grew more than four times.  That is probably why total leased solar systems topped $1 billion by the end of the year.    Contracted payments for all those leased systems totals $1.1 billion  –  a number akin to a backlog.

As impressive as all these numbers might appear, for me it is really not enough to get involved with SolarCity.  I need to know the company is running an efficient operation.  SolarCity has this unusual business model with revenue coming from sales of solar systems as well as recurring payments from leased systems.  Financing is a key driver of both revenue streams.

So a look at SolarCity’s financing interval is the first place to begin looking  –  how much financing the company needs to support operations.  We all learned this in financial accounting.  Inventory Days plus Accounts Receivable Days tells us how many days worth of sales have to be financed by the company.  At the end of 2012, Inventory Days Outstanding totaled a whopping 413 days and Days Sales Outstanding in Accounts Receivable were 71 days.

Of course, the cheapest source of financing for operations is credit from suppliers.  At the end of 2012, Payables Days totaled 296 meaning SolarCity is in good enough favor with its suppliers to credit for nearly a year’s worth of supplies.  So we have a financing interval of 206 days (413 days plus 71 days minus 296 days) that have to be covered by some other source of financing.  Put in dollar terms based on sales in 2012 $72.6 million dollars.  The calculation goes like this:  $128.7 million sales in 2012 divided by 365 yields a dollar value of sales per day.  Then multiplied by 206 days tells us what has to be financed.

Having just gone public we have limited visibility on SolarCity’s track record in managing its working capital.  If the financing internal of 206 days at the end of  2012 appears lengthy, the same measure for 2011 was absurdly low at just 11 days.  SolarCity it seems was able to string suppliers along on average over three years!

We can take a couple more insights from this exercise.  Collections on accounts receivable is excellent  –  just 71 days.  What is more, the number of days worth of sales held in inventory has been more than cut in half.  Still there were 413 days worth of sales sitting in inventory at the end of 2012.  There is still room for improvement.

Thus we get a bit of encouragement and a bit of reality from SolarCity’s balance sheet.  Shares of SolarCity have been trimmed back, but not enough for me.   I would pay the price if the company were closer to profitability or further along in managing working capital.
 
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.