News Analysis date published New: 
Wednesday, May 12, 2010 - 11:10
New Date created: 
Wednesday, May 12, 2010 - 10:20
New Date last updated: 
Wednesday, May 12, 2010 - 11:10

Wednesday Losers: A Slumping Bellwether Solar Stock

Wednesday, May 12, 2010 11:10 AM

Investors continue to show their ambivalence about solar power stocks, as every fresh quarterly report is met with a fresh round of aggressive buying or selling, Simply put, these companies are neither as good nor as bad as their quarterly reports imply. Instead, these reports highlight that the industry is going through myriad growing pains and will be unlikely to exhibit its true earnings potential for a few more years. So any time one of these names sells off on tepid quarterly results, you may want to dig in to assess whether the long-term outlook remains on track.

SunPower (Nadsaq: SPWRA) is often cited as one of the best sector plays as the company possesses a solid technology base, a blue-chip customer list and eventually, ample manufacturing capacity. Over time, that should translate into solid sales and profit growth - but not yet.

On Tuesday evening, Sunpower showed some more growing pains, and investors are punishing the stock to the tune of an -8% drop. Sunpower is seeing ample demand - perhaps too much in the face of its still-growing capacity. The company scrambled to meet demand for its solar power panels, which led to a spike in costs. As a result, per-share profits were disappointing. Not a bad problem to have, but a problem nonetheless.

Sunpower’s primary focus is on large installations, such as on the roofs of Wal-Mart (NYSE: WMT) stores. And based on its technology roadmap, the company’s competitive position should only get stronger in this market. That’s because Sunpower’s solar power panels will soon convert 23% of the sun’s energy into electricity, which is roughly 20% to 30% better than past energy conversion ratios. That means customers will reap an even greater payback on their investment, and reduce the break-even time on what is a costly investment.

Shares of Sunpower are more than -50% off of their 52-week high as investors grow frustrated with the company’s bumpy profit growth. Indeed 2010 and 2011 consensus profit forecasts have come down a good bit in recent months as investors anticipate temporary margin pressures. Their impatience could spell opportunity for you.

Company Name (Ticker) Intra-Day Price Market Cap 52-Week High 52-Week Low 2010* P/E 2011* P/E
Sunpower (Nasdaq: SPWRA) $14.22 $1.4B $34.00 $14.00 10.0 7.0
Systemax (NYSE: SYX) $19.95 $727M $11.22 $24.33 11.5 11.0
Electronic Arts (Nasdaq: ERTS) $17.58 $5.8B $23.76 $15.70 27.5 20.4
*Based on consenus estimates prior to recent earnings release

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Every quarterly press release is peppered with bullish pronouncements as management plays up the most appealing financial metrics form the just-completed quarter. Bad news gets buried in the data, but investors are not easily duped. That’s why they’re selling shares of Systemax (NYSE: SYX) this morning. When the office equipment supplier announced robust quarterly results on Tuesday evening, it played down the fact that gross margins fell all the way to 13.8% -- a record low for the company. Those weak margins led to a $0.09 earnings-per-share shortfall from the $0.40 consensus, good enough for a -9% drop in the stock in Wednesday trading.

The weak margins highlight a real concern for distribution businesses like this. Sales may grow at an impressive rate, but competition is so intense that it becomes harder and harder to boost the bottom line. While analysts had hoped per-share profits would grow from the $1.25 to $1.40 pace registered in the last two years to around $1.75 this year, this morning’s report indicates that profits probably won’t grow at all. Today’s sell-off only begins to incorporate that downbeat view. Shares, which still trade for around 13 times the likely 2010 profit forecast, could sell down to a price-to-earnings ratio (P/E) of 10 once investors fully grasp the lack of organic profit growth in this business model.

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We recently noted the brightening outlook for Electronics Arts (NYSE: ERTS). Yet even as the video games maker posted solid fiscal fourth-quarter results Tuesday evening, it cautioned that first-quarter results may be weaker than analysts anticipate. And that’s pushing shares down nearly -6% this morning.

But the tepid forecast looks more like a case of conservatism than anything else. After all, this management team had lost credibility in the past trying to predict an upturn. This time around, they may prefer to keep expectations low. Yet as you run through the company’s conference call, you hear of many data points that show it is back on track, developing fewer -- but more-focused -- titles. The company’s recently-released slate of new games is selling quite well, and some near-term launches are generating solid advance buzz. Today’s sell-off may create an entry point for investors who have the patience to see a turnaround slowly emerge.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.