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SunPower Beaten up to Buying Opportunity Levels

Posted on Monday, Jul 21st 2008

SunPower (SPWR) continued to outperform market expectations in their recently announced Q2 earnings release. Revenues of $383 million beat the market’s expectations of $345 million and grew 40% over the quarter and a staggering 120% over the previous year. The Components segment contributed 29% to revenues, growing 18% sequentially and 60% over the year. Systems brought in 71% of revenues, an increase of 51% over the quarter and 160% over the year.

Europe continued to be SunPower’s biggest market, contributing 82% of revenues.

EPS of $0.61 also beat the Street’s expectations of $0.51, growing 56% sequentially and 144% over the year.

Management revised its guidance for 2008. For Q3, SunPower expects revenues of $340-$355 million with EPS of $0.53-$0.57. For Q4, revenues are expected to be $395-$425 million with EPS of $0.73-$0.80. The above estimates take year 2008 revenue guidance to $1.39-$1.44 billion with an EPS of $2.26-$2.36. SunPower also gave an early 2009 guidance of revenues of $2.0-$2.1 billion with EPS of over $3.50.

This quarter, the company continued to implement strategies of vertical integration, broad and differentiated product offerings, and a regional mix. To grow in Japan, they teamed with Toshiba on their newly introduced residential product line. They have been expanding in Italy, Korea, and Germany and are establishing a footprint in France. They remained technical leaders in the field, with their Generation 2 product efficiency increasing to 23.4%.

SunPower is well geared to face current market challenges. With their strong dealership hub in Madrid, they can handle market disruptions in the Spanish power plant market by diverting effort to other market segments. The delay in the extension of the United States investment tax credit will impact their commercial market in the US, but they are ready to address residential sales. They were recently selected by Florida Power and Light to build the largest photovoltaic power plant in the United States, a 25-megawatt plant in DeSoto County, in addition to a 10-megawatt plant at the Kennedy Space Center.The company realizes the way to capture more market share is to cut costs to be able to compete with retail and wholesale rates in the developed world on a level cost-of-energy basis. They aim to reduce costs to 50% of 2006 levels by 2012. Technological innovations to improve silicon conversion efficiency, contracts with polysilicon suppliers, and thinning of wafers, which will lead to lower silicon consumption and economies of scale, are all helping SunPower towards achieving their goal.

The stock did not react favorably to the impressive results. From the previous day’s close of $80.15, it slipped 6% and closed at $75.32 on the day of the results announcement. It is presently trading at $76.70. Concerns over both uncertainties in Spain and the US tax credit loom over the company, the global market’s awareness and adoption of solar strategies notwithstanding.

SunPower is on my list of long-term hold stocks, and I strongly believe that this company will continue to grow at an impressive pace. The government will change in the US this year, and the tax credit will most likely be reinstated. In India, energy policy is becoming a key issue to be addressed, and Solar will feature as a core strategic lever. [Read “Vision India 2020: AdiShakti] China, I believe, will also get its act together in the next few years.

All this will play in SunPower’s favor. I maintain this one is a long-term investment – a Buffet-style, believe in the company, believe in the industry, believe in the value proposition style story.

1yr SPWR

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No question about the potential Sramana. Adoption is the issue. With energy demand predicted to rise 50% by 2030 the renewable sector should outperform all others. The key will be Kyoto 2 in 2012 and a change in consumer drivers.

David Bristow Monday, July 21, 2008 at 2:41 PM PT