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Finance

Are SunPower and First Solar in a New Era?

  • Hydrocarbons are under siege in Washington DC
  • The green path will continue and spread from consumption to production
  • SunPower (SPWR) beat on Q4 EPS but missed on revenues
  • First Solar (FSLR) reported this week
  • SPWR and FSLR are likely in the buy-zone at current prices

Solar power is all the rage. At least once a day, my phone rings with what telemarketers tell me is a “compelling and once in a lifetime offer” to switch our energy source to solar power. We live in Las Vegas, where the sun is intense and cloudy days are the exception instead of the norm. We have not switched over just yet, but we consider the transition to put some of those sun-reflecting panels on the roof every once and a while.

As waves of new arrivals to Nevada cross the border, the new home construction market is booming. Most of the new homes come with those solar panels. The sun is a powerful energy source of the future. The transition from fossil fuels to solar and other alternative energies kicked into high gear in early 2021 as the Biden administration rings in a new era of “cleaner energy” to address what it calls “the existential threat” of climate change. SunPower (SPWR) and First Solar (FSLR) are two companies benefiting from the new greener path towards US energy consumption.

Hydrocarbons are under siege in Washington DC

On his first day in office on January 20, 2021, President Joe Biden canceled the Keystone XL pipeline project that brings petroleum from oil sands in Alberta, Canada, to Steele City, Nebraska. The Democrats captured the White House and both houses of Congress running on a platform with a pledge to address climate change by increasing regulations and putting limits on fossil fuel production.

The previous administration had championed US oil and gas production, which was a continuation of policies over past decades to achieve energy independence from the Middle East. Massive discoveries of natural gas reserves in the Marcellus and Utica shale regions of the US and technological advances in hydraulic fracking that extracts petroleum and gas from the earth’s crust made the US an energy powerhouse.

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In the oil market, daily US output rose to 13.1 million barrels per day in March 2020, surpassing daily production levels in Saudi Arabia and Russia. Natural gas output rose to a level that allowed for liquefying the gas for export by ocean vessels to consumers worldwide.

Meanwhile, concerns about the impact of fossil fuel production have trumped the previous desire for energy independence. The Democrat’s progressive wing favors a ban on fracking and a “Green New Deal” that replaces all hydrocarbons. While President Biden may not incorporate the totality of the “Green New Deal,” he will not support the previous status quo in oil and gas production over the coming years.

The green path will continue and spread from consumption to production

The US is on a far greener path for energy production in early 2021. However, the shift to more climate-sensitive solutions for consumers has been underway over the past years. The number of EVs or electric-powered vehicles on the road has exploded. Elon Musk’s Tesla (TSLA) is now the world’s leading carmaker by market cap by over three-fold.

As the demand for new homes rises, many homebuilders install solar panels on roofs to replace traditional power sources. The trend in EV and solar power demand began long before the Biden administration. Consumption is driving production, and that trend is likely to continue over the coming years for practical instead of political reasons. Politics tends to get all of the headlines, but consumer behavior dictates real economic and social change.

SunPower (SPWR) beat on Q4 EPS but missed on revenues

SPWR has been around since 1985, with its headquarters in San Jose, California.  The company delivers solar solutions worldwide and operates through its SunPower Energy Services and SunPower Technologies segments. The company provides solar power components to dealers, system integrators, and distributors. SPWR offers commercial rooftop and ground-mounted solar power systems, residential mounting systems, and post-installation operations and services. It also leases and sells solar systems to residential customers.

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The company has beat consensus EPS forecasts over the past four consecutive quarters.

Source: Yahoo Finance

While SPWR beat EPS by seven cents in Q4 2020, the company reported revenue of $341.8 million, which fell short of the $354.2 average estimate. Moreover, SPWR expects revenue from $270 to $330 million in Q1 2021, which was disappointing guidance.

SPWR shares were trading at just below the $35 per share level at the end of last week. The company has a market cap of $5.93 billion and trades an average of over 8.8 million shares each day. Thirteen analysts on Yahoo Finance have an average price target of $30.89 per share, with forecasts ranging from $13 to $49 per share.

Source: Barchart

The chart shows that SPWR reached its all-time high in 2007 at $164.49 per share. In March 2020, the shares fell to a low of $4.03 before recovering to $57.52 in January 2021. At a price-to-earnings ratio of around 14, SPWR is trading at a reasonable level despite the latest revenue guidance.

First Solar (FSLR) reported this week

FSLR has been around since 1999, with headquarters in Tempe, Arizona. FSLR provides photovoltaic solar energy solutions in the US and worldwide. FSLR operates in two segments, Modules, and Systems. The Modules segment designs, manufactures, and sells cadmium telluride solar modules that convert sunlight into electricity to integrators and operators of PV solar power systems.

The Systems segment provides power plant solutions, including project development, engineering, procurement, construction, and operating and maintenance series to utilities, independent power producers, commercial and industrial companies, and other system owners.

FSLR has beat analyst EPS forecasts over three of the past five quarters.

Source: Yahoo Finance

In Q4, expectations were for EPS of $1.23, and the company reported $1.08, which was a disappointment. FSLR has a $8.586 market cap at $81.02 per share. A survey of fifteen analysts on Yahoo Finance has an average price target of $88.89 for the stock, with forecasts ranging from $38.40 to $141 per share.  

Source: Yahoo Finance

As the long-term chart highlights, FSLR shares reached an all-time high in 2008 at $317 per share. The stock dropped to $28.47 in March 2020 as the pandemic’s risk-off conditions crushed energy prices and stocks. Since then, FSLR recovered to a high of $112.50 in January 2021 and were trading around the $81 level at the end of last week after the earnings disappointment and general selling in the stock market.

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SPWR and FSLR are likely in the buy-zone at current prices

SPWR and FSLR were at highs when fossil fuel prices rose to peaks. In 2008, nearby NYMEX crude oil futures rose to an all-time peak at $147.27 per barrel. Nearby natural gas traded to a high of $13.694 per MMBtu. Crude oil was at the $61.50 level at the end of last week, with nearby natural gas below $2.80 per MMBtu.

Meanwhile, the substantial shift in US energy policy supports petroleum, natural gas, and alternative energy companies like SPWR and FSLR. US fossil fuel output will likely decline as regulations and limits on extracting fossil fuels from the earth’s crust increase. Meanwhile, the demand for greener power solutions will continue to rise.

SPWR and FSLR are companies that stand to gain over the coming months and years as energy investors look for companies in lock-step with the US political environment.

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SPWR shares were trading at $38.35 per share on Tuesday morning, up $0.16 (+0.42%). Year-to-date, SPWR has gained 49.57%, versus a 4.29% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More…

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