SunPower Corp. (SPWR) soared more than 50% last week on the announced sale of its Antelope Valley Solar Projects in California to MidAmerican Solar, a company controlled by Warren Buffett’s Berkshire Hathaway (BRK-B). A limited presence in utility-scale photovoltaic (PV) markets outside of North America, combined with the continued struggle to align production costs with weak average selling prices suggests the rally -- seen in a stock chart -- could prove ephemeral.
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MidAmerican will pay the San Jose, California-based solar panel maker between $2 billion to $2.5 billion for the 579-megawatt Antelope Valley projects, which are located in Kern and Los Angeles counties. SunPower has also signed a multi-year contract to construct, operate and maintain the utility plants, according to regulatory filings.
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Investors shouldn’t be taken in by the $2.5 billion price tag affiliated with the Antelope Valley sale. Ingrid Ekstrom, a spokeswoman for SunPower, declined to specify how much of the total amount being spent is actually for construction costs and how much of the purchase price is for solar panels.
Although the sale gives SunPower a captive demand channel for some of its production (through 2015), contrary to the optimism driving the stock price, it remains business as usual for crystalline silicon (c-Si) module makers: Due to continued overcapacity (as Chinese manufacturers flood global channels with the help of “unofficial” government subsidies – aka, loans), a recovery in pricing in key worldwide markets isn’t expected until – at the earliest – the second half of 2013, according to a new market report by PV research firm IHS iSuppli.
In 2012, weak industry conditions forced more than 350 companies in China -- from equipment suppliers, and polysilicon producers to module manufacturers -- to stop operations entirely, according to market research firm ENF. Unfortunately, consolidation has done little to slow this problem of overcapacity.
Historically, SunPower has had success in charging a premium price for its solar panels due to its industry leading c-Si module efficiency (as high as 24%). Like its Chinese competitors, however, the company has had trouble in maintaining profitable operating margins, as average selling prices (ASP), in recent years, have declined more rapidly than initiated cost-reduction programs. Though management remains tight-lipped on actual ASPs, industry data shows that pricing for its utility-scale systems has fallen from $5.94 per watt in 2009 to a recent low of $2.13. (These numbers do not include “balance of system” costs, which are the non-panel costs incurred, such as wiring, mounting structures, and on-grid connection expenses).
Even record low prices ($21 per kilogram) and a visible longer-term surplus in the availability of polysilicon, the key raw material in PV wafers, hasn’t eased cost pressures. To address its dwindling margins, in October 2012 the company announced it would idle half of the 12 lines at its 330 megawatt Fab 2 cell manufacturing plant in the Philippines, axing 15% of its workforce. However, as illustrated in the following profit margin chart, in an industry where production exceeds global demand by roughly two times, accelerating cost-reduction programs becomes more a matter of survival than just quarter-to-quarter profitability.
Going forward, management hopes to replicate the success of its Antelope Valley project with contract wins for utility-scale projects in new markets, from Australia to the Middle East and Asia, in particular Japan and mainland China. To date, however, its global footprint is nondescript: In the first nine months of 2012, North America and Europe accounted for 68% and 23% of total sales.
Should global market conditions rebalance in second-half 2013, the company still faces the same old headwinds: the presence of cheaper Chinese competitors, like Yingli Green Energy (YGE), and customers highly dependent on public subsidies, whether the nomenclature be tax credits or the once-popular feed-in tariffs. Christopher Blansett, an analyst at JPMorgan Chase (JPM), articulated it best: “SunPower is living off of borrowed time. Eventually, revenue from [these] large projects will end, and new sales will probably be at lower prices.”
Though SunPower is hemorrhaging cash as it struggles to match inventory costs with market demand – trailing 12-month negative free cash flow was $204 million -- the company has a white knight: Total SA (TOT) owns a 66% stake, acquired for $1.38 billion, or $23.25 a share in 2011. SunPower also has access to a $600 million line of credit made available to it by the French oil & gas giant. Ergo, the company isn’t exposed to the same credit risk as some of its smaller c-Si module competitors.
In addition to cheaper borrowing costs, SunPower is hoping to leverage Total’s relationships with energy hungry customers as it seeks solar panel contracts in Africa, the Middle East and Asia. It’s worth noting, too, that the current standstill agreement that prohibits Total from acquiring the remainder of SunPower expires come 2014.
The Antelope Valley deal alone will not return SunPower to profitability; and, until SunPower can demonstrate a consistent ability to close the cost gap between manufacturing costs and average selling prices, it’s unlikely that Total would exercise future stock purchases. Consequently, investors should use the temporary lull in cloudy weather to exit the building.
David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at firstname.lastname@example.org.
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