Sunpower Optimistic, But Needs Cash

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This recent post explored the unusual mating call of a solar panel manufacturer, SunPower Corporation (SPWR:  Nasdaq).  The Company is looking for a partner to bankroll the upgrade of a manufacturing facility in Hillsboro, Oregon acquired in October 2018, in a tie up with one of its rivals, SolarWorld America.  SunPower now has one less competitor and more room to flex its production muscles.  However, capital is still important.

The Company suffered a net loss of $811.1 million or $5.76 per share on $1.73 billion in total sales.  Profit margins were negative straight down. Investors could accept the loss without too much worry if the pace of cash flow was encouraging.  Unfortunately, in 2018 operations required $543.4 million in cash resources to make it through the year.

There are limits as to how long SunPower can keep up that pace.  The Company ended December 2018 with $305.4 million in cash on the balance sheet and $1.5 billion in total debt.  Stated otherwise SunPower has limited flexibility!

Management tried to strike a note of optimism several weeks ago when the reporting year-end 2018 financial results and providing guidance for the year 2019.  Improvements are expected in the coming quarters.  Of course, management is hedging the prediction with the usual hedge that growth will be weighted to the second half of 2019.  Guidance includes the expectation to ship up to 150 megawatts of the P-Series solar modules from the Hillsboro facility.

P-Series Solar Module diagram

Changes in the company’s leasing program could be pivotal in improving reported sales and expenses.  The residential leasing portfolio has been sold and the business leasing structure has been adjusted.  Investors will have to wait until the end of March 2019, to get enough details to make an assessment of the potential in the new plan.  The company is staging a ‘capital markets day’ with investors and analysts on March 27th.

Even this superficial review of SunPower’s financial performance suggests investors should move cautiously. Management had pledged to trim operating expenses as well as reduce leverage using proceeds from the residential leasing portfolio.  Both actions could improve profit results going forward. That means improved cash flows that could deliver returns for a new investor.

Unfortunately, cost of silicon is an even more pressing issue for the Company and management has little control over that. Silicon has been in short supply for at least the last two years and that has led to price increases.  The U.S. anti-dumping case resulted in higher import tariffs of silicon metal, effectively doubling raw material prices.  SunPower could have a to have a tough time with margins even with cost cuts at the operating level.

SunPower is looking for a new mate in its Hillsboro, Oregon facility.  There is much afoot for the Company  –  new, more competitive products based on the P-Series solar module and changes on the business leasing business model.  That has to be appealing to any number of financial or strategic investors.  It will take some careful due diligence before cutting a check!

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.

This article was first published on the Small Cap Strategist weblog on 3/1/19 as “SunPower Promises for 2019.” 


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