Friday, October 17, 2008

Sunpower (NASDAQ:SPWRA): Downgraded at Citi and Merrill Lynch

Sunpower (NASDAQ:SPWRA) has some nasty comments from several tier-1 firms:

- Citigroup notes that following through on their call into what they thought would be the last good Q before big risk develops, they are downgrading SPWRA from Hold to Sell taking advantage of ~25% move post-earnings. The Street is already negative on this sector (firm highlighted ’09 supply shock back in May ’08), but this is a 100% stock-specific call. The bottom line here is that they think a big miss is coming in CQ1 as classic signs of inventory risk are developing in its components biz, while CQ4 should represent a multi-year peak in its margin structure. With respect to liquidity, it has access to cheap money through a term-loan but will continue to skate on thin ice as it looks unlikely to generate FCF through C2010. Risks to the call include potential for SPWRA to self-finance projects very near-term, which could mute some channel risk (albeit w/other ramifications). F09 (GAAP) from $2.29 to $1.92, F10 from $3.06 to $2.60. Target $55 to $30 on lower multiple on GAAP EPS.

- Merrill Lynch downgrades the stock to Neutral from Buy and are lowering their PO to $55 from $95, primarily on demand concerns in the U.S. residential solar market. They continue to think SPWR is one of the best positioned solar companies; however it’s difficult to ignore the current macroeconomic environment and the pressures it will put on consumer spending on capital intensive projects like solar. Firm's new PO reflects a 20x multiple on their ‘09 non-GAAP EPS (including options) and is supported by their return on operating capital model.

Though the ITC extension was a major milestone for the solar industry that should drive growth in the U.S. over the coming years, the firm is increasingly cautious on near-term residential solar demand given weakening economic and employment trends, falling home prices, and tightening credit. Sunpower has about 1/3rd exposure to the residential solar market and ~25% exposure to the U.S., which could put estimates at risk.

Sunpower’s component business exceeded expectations on both revenues and margins. Likewise, the company’s 4Q component business outlook was better than management’s prior forecast. However, the firm wonders how much of this is inventory stocking at dealers versus actual sell through given their concerns about residential related solar demand, particularly in the U.S.

- Goldman Sachs is lowering SPWRA tgt to $36 this morning.

Notablecalls: Citi's comments regarding a 'big miss' coming will kill the stock today. Short interest stands close to 40% so the action will be choppy.

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