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SunPower in a Restructuring Mode

Zacks Equity Research

SunPower Corporation (SPWR) has planned restructuring of its Philippines manufacturing operations, which also includes reduction of its employees.

As per the plan, SunPower will make six of the 12 lines in its Fab 2 cell manufacturing plant inactive for the time being as well as stop 20% of the panel manufacturing in Philippines. Apart from significantly reducing inventory, lowering operational costs and improving efficiency, these steps would result in an overall blended utilization of approximately 60% for the fourth quarter of 2012.

In addition, the restructuring plan includes lowering the workforce by approximately 900 employees with majority reductions mainly in the Philippines.

The company is moving well with its cost reduction programs in order to reach its cost per watt goal of less than 75 cents per watt on an efficiency adjusted basis for the lowest cost solar panels by the end of fiscal 2012. The company expects restructuring charges to be in the range of $10 million to $17 million with majority of it to be incurred in the fourth quarter of 2012. The company’s restructuring charges include severance benefits, lease and related termination costs and other associated costs. SunPower anticipates more than 90% of the charge to be in cash.

The company re-affirmed its fiscal 2012 earnings guidance. At its second-quarter 2012 earnings call, the company had indicated that it will remain committed to achieving break even or better non-GAAP profitability. These initiatives would allow the company to effectively compete during the current industry transition and oversupply environment.

On November 1, 2012, the company is expected to release its third-quarter 2012 earnings results. The Zacks Consensus Estimates for third-quarter 2012 and fiscal 2012 are currently a loss of 19 cents and 39 cents, respectively.

One of the company’s competitors, Suntech Power Holdings Company Ltd. (STP) also recently announced its restructuring plans to reduce imbalance between demand and supply, and improve trade protectionism, which will subsequently decrease the level of competition and generate higher profitability.

Suntech’s current strategy includes 5 important facets, such as technology and customer-service, right-sizing of production capacity, drive down cost, streamline its operating structure and improve its financial position. Suntech plans to reduce its operational solar cell capacity to 1.8 gigawatt (“GW”). The module capacity and wafer capacity will remain at 2.4GW and 1.6GW, respectively. Suntech intends to reduce its operating expenses by 20% year over year. In addition, the company targets to create a sustainable business model and return to positive operating cash flow in 2013.  Also, Suntech plans to strengthen its financial position, which includes extension of the maturity of credit facilities, while continuing to reduce total debt and related interest expenses.

Sun Power Corporation is a vertically-integrated solar manufacturer. Going forward, we are bullish on the company due to its diversified channel strategy and has a strong presence in the residential and commercial market, along with its status as a conversion efficiency leader. The company also has a steadfast focus on spreading its revenue stream by climbing the solar value chain.

However, we remain concerned due to the sharp decline of average selling prices of modules due to an industry-wide oversupply glut. Moreover, SunPower operates in an industry with increasing competitive pressure as the photovoltaic industry’s total manufacturing capacity exceeds the current demand for solar modules. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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