Earnings season is once again upon us, and the losses on subprime mortgages still continue to have a negative spill-over on the stock market. SunPower (SPWR – Last trade $68.71) reported ahead of the opening bell, and shares tanked. SPWR August option implied volatility moved up to 57 before the start of trade, above its 6-month average of 38, according to Track Data, suggesting larger risk. By the end of the day SPWR shares lost 1.84%, staging only a modest recovery in the afternoon. These losses are even more significant given the rally we saw in U.S. stocks today, with the DOW ending above 14,000. Given the sky-high valuation on SPWR, does this pullback in SPWR present a buying opportunity?
Photo:rednuht, Creative Commons, Flickr
A summary of their Q2 earnings results:
- SPWR posted a Q2 non-GAAP EPS of $0.25 vs. street estimate of $0.21
- Q2 non-GAAP revenue of $174.1M is up 22% from $143.2M in 2Q06.
- Guides Q3 EPS in the range $0.25 to 0.29 vs. street estimate of $0.27
- Guides Q3 revenues $205M to $225M vs. street estimate of $175.9M
- Guides 2007 EPS in the range $1.13 to $1.20 vs. street estimate of $1.15
- Guides 2007 revenue in the range $730M – $750M vs. street estimate of $695M
- Guides 2008 EPS $1.80 to $2.00 vs. $1.92 expected, while 2008 revenues are seen between $1.0B and $1.2B vs. $1.1B expected
Don't let the guidance fool you. SPWR tends to provide conservative guidance, and there is a good chance we could see upside in coming quarters. For example, the company's Q2 non-GAAP EPS of $0.25 compares to management's initial guidance of $0.18 to $0.22, and the Q2 revenue figure of $173.8M is significantly ahead of management's guidance of $150M to $160M. Management's guidance is not a justifiable reason for the sell-off.
The main reason for the sell-off in SPWR shares seems to be the announcement that the company is to issue 2.45 million shares of class A common stock and $175M in convertible debt to fund the construction of a new plant, FAB 3. The plant is expected to have 500MW capacity and is expected to come on line in late 2009. But investors seem to have forgotten to read the fine print of the funding agreement, creating a buying opportunity.
A Thomas Weisel note pointed out that SPWR has entered into a share lending agreement with an investment bank, in that 1.6M of the 2.45M shares issued will be lent to the bank. GAAP rules dictate that that 1.6M shares, which must be returned to SPWR prior to August 2027, will not be counted in shares outstanding. This means that dilution will be minimal and investors may have overreacted to the secondary offering. Apart from the Thomas Weisel note I haven't seen anyone else pick up on this.
If we take a step back and look at the big picture, the glass (as always) appears to be half empty on Wall Street. At the start of this year, forecasts were for Q2 operating earnings for the S&P 500 companies in aggregate to grow 8% on a year-over-year basis. Just three weeks ago, that forecast had been lowered to 6.5%. Now the estimates have been quietly lowered to just 4%. The same happened in Q1. In January, estimates for first quarter earnings growth were 8%. That dropped to 6% by March, and 4% just ahead of the reports. Wall Street has a history of underestimating earnings growth and I expect a solid earnings season to limit any downside from the subprime mess. As long as the U.S. jobs market remains robust amid the housing slowdown we are likely to see continued gains for stocks. SPWR could benefit from this momentum, especially with oil heading to $80.
Disclaimer: I do not own SPWR. I do not own a solar panel.