Sunpower (NASDAQ:SPWRA): Upgrade to Buy - Princeton Tech Research

Soleil's Princeton Tech Research is upgrading Sunpower (NASDAQ:SPWRA) to Buy from Hold with a $14 target (prev. $21), representing 40% upside.

With the shares of SunPower now trading at: 1) A discount to tangible book value of $10.70 per share; 2) One of the lowest EV-to-EBITDA multiples in the PV industry - 6X on their 2011 estimates) and 3) At its all-time low (SunPower's shares are now actually trading almost 45% below their November 2008 low), the firm believes the risk/reward profile in the stock is positive and are upgrading their rating to a Buy. Given the shift in SunPower's business mix toward that of an E&C (Engineering & Construction) company, Princeton is reducing their target EV-to-EBITDA multiple to 6X, and their target Price-to-Tangible Book Value to 1.3X. These take their target price to $14/share - roughly 40% upside from last night's closing price.

Waiting For Earnings - The management of SunPower, as is the case with several other PV companies with a large exposure to the downstream installation business, has pushed earnings expectation for 2010 deep into the back half of 2010. The company is now saying that it will realize roughly 80% of its earnings for 2010 in the fourth quarter. The lack of any significant level of real earnings through the first three quarters of the year - combined with the company's opaque business model and insanely complex GAAP/non-GAAP approach to reporting earnings - has decimated the company's share price this year. SunPower's shares are now down 58% year-to-date (vs. a 6% decline for the S&P 500). Princeton believes SunPower (and other large system developers) will see a surge in business in the fourth quarter - the earnings will come through as management is forecasting.

The firm has reduced both their 2010 estimates (from $1.30 to $1.03 per share) and their 2011 estimates (from $1.65 to $1.55 per share). Given:

Lack Of Visibility To SunPower's Business Model - The downstream installation business in the PV industry is inherently difficult for outsiders to track - an enormous multiplicity of projects; a relatively "soft" backlog; and a lack of a long track record render the downstream PV business almost un-analyzable to an outside; and

Opacity Of Segment Reporting - SunPower seems to go out of its way to bury the economics of their manufacturing operation as deeply as possible. The lack of disclosure in this regard reinforces the perception that the company is a high-cost producer within the PV industry;

Princeton notes they are first to admit that their earnings estimates for SunPower are little more than educated guesses, which are heavily, heavily dependent on management guidance. Nonetheless, they do know that 2010 is going to be a year of significant growth in global installations of PV systems (up more than 90% on our estimates - 14 GW vs. 7.3 GW in the prior year). They also know that other companies in the downstream installation business are anticipating the bulk of their project business to close in the fourth quarter of 2010. Given this (and management guidance for the third quarter) they have pushed the bulk of SunPower's earnings into the fourth quarter of the year. Their 2010 estimate is now below management's guidance of $1.35-1.65 per share. Given that roughly 90% of the company's earnings are going to come in one quarter - the fourth - the firm is going to err on the side of conservatism on their estimates.

SunPower's management has provided no guidance for 2011 at this point. They are assuming - given the company's large backlog of project business - that SunPower can increase revenues 25% in 2011 and essentially hold EBITDA margins flat in the 12.5-13.0% range.

Notablecalls: SPWRA is now trading at a discount to tangible book value (tangible book value was $10.70 per share on September 30th).

- The company is profitable.

- There's a 30%+ short interest in the name.

Princeton Tech Research is among the smarter operators in Solar space. If they tell to buy SPWRA here, people will take note. Ignore the $14 price target. It's mostly likely too conservative if Princeton's right.

Goes $10.50+ today barring a market crash.

I want fills around $10.30-.40 level.

Note that Raymond James is also upgrading SPWRA this morning, to OP from MP witha $12.50 target.