Interesting Report from Sunpower (SPWR)

Interesting reaction to Sunpower (SPWR) earnings today - I have never been a big fan of this name, because Suntech Power (STP) offers essentially the same proposition (scale/size), with far cheaper labor (Chinese), and has always traded at a large discount to Sunpower so you get a lot more 'value' with Suntech Power. [Sep 21 - Suntech Power Gets an Analyst Upgrade]

So Sunpower, the US counterpart to STP trades at over 70% of its value - both companies have similar market caps and similar growth rates - Suntech Power actually has better margins across the board.

So if this inefficiency is closed, we should see a nice ride up on Suntech Power despite its premium valuation.

I was a bit concerned last quarter with Sunpower's margins as well [Reducing Trina Solar by 2/3 Due to Sunpower] and margins are an ongoing concern in this area for me in the future, but on first glance Sunpower seems to have done very well on the gross margin line this quarter. I'll have to dig in deeper but my assumption for now is the stock is selling off on "good but not good enough future guidance", along with flat sequential revenue. Further it appears they are guiding 2008 revenue below analysts expectations.

I believe investors in this sector expect these companies to ramp up revenue at a break neck pace each and every quarter even though there are supply constraints on expansion in the industry from one 90 day period to another. Not that investors care about such small details. Just looks like a case (again) of too high of expectations. Sunpower has actually fallen so much it might actually be worth a look at some point. This name was $145 in late December; it now trades at $63. Wow.

• SunPower Corp. lifted its 2008 profit and revenue outlook on Thursday and said it expects to have adequate polysilicon supplies to increase production sixfold by 2010.
• The solar-power product maker expects a per-share profit of $1.17 to $1.27, up significantly from its 11 cents per share in 2007. It expects adjusted per-share earnings of $2 to $2.10, compared with $1.35 in 2007.
• The company forecast full-year revenue of $1.2 billion to $1.3 billion and forecast 2009 revenue will grow 40 percent to 50 percent from those levels.
• The company earlier estimated adjusted 2008 earnings of $1.90 per share to $2.05 per share on revenue of $1.1 billion to $1.25 billion. Analysts polled by Thomson Financial expect full-year profit of $2.06 per share, on revenue of $1.54 billion. They expect revenue of $1.9 billion in 2009.

Again the trick in this sector is not revenue growth but profitability. Up until the recent past, all investors have seemed to care about is top line growth, and assuming bottom line growth will just continue unabated on a straightline path. But this assumption is dangerous and misses a lot of sector specific issues we've discussed in the past. Certainly one can envision an environment where revenue growth continues to increase but profitability growth stalls due to a myriad of issues from ASP pressure, polysilicon spot pricing pressure, competition, selling into markets/countries with weaker subsidies and government subsidy reductions in previously "very friendly to solar" countries. [The Long Term in Solar] Lots of moving parts certainly to watch in this sector.

Long Suntech Power in fund and in personal account