For a brief moment on Tuesday it looked like SunEdison (SUNE) might make bullish progress, as the market celebrated third-quarter revenue that rolled in better than anticipated.
It was a short-lived intraday gain from SUNE stock, however, as the sizable earnings miss weighed heavily on investors’ minds, as did the news that the company was feeling a little cash-strapped, sending SUNE shares down a whopping 22%.
The $64,000 question in the midst of all the carnage, of course, is whether or not SUNE stock has become an undervalued buying opportunity thanks to the sharp pullback.
SunEdison Earnings
The good news is, solar panel maker and solar-power project developer SunEdison improved its top and bottom line in the third quarter of 2015. And, the top line for last quarter was larger than expected.
The bad news is, the per-share loss booked by SUNE was far worse than expected, and the company’s outlook looks bleak as the viability of its business model is increasingly called into question.
In Q3, SunEdison lost 91 cents per share on revenue of $476 million, versus a loss of $1.06 per share of SUNE stock in the third quarter of 2014, when it generated $469 million in sales. Revenue rolled in stronger than the expected $437.4 million, but analysts were only looking for a loss of 69 cents per share.
The decided fiscal weakness reflects a message the company was forced to send in early October, when it announced it would be laying off 1,000 workers to “simplify its business structure by removing duplicative activities created as a result of recent M&A activities and business growth, through centralizing global business development and operations, and consolidating global support teams.”
That decision came just weeks after SunEdison CEO Ahmad Chatila promised positive cash flow in 2016 as part of a deliberate effort to convert itself from a (cash-burning) growth machine and into a cash cow.
Investors, however, are starting to wonder if either business plan can turn a respectable profit.
A Messed Up Model?
SunEdison’s roots are in solar panel manufacturing, but that line has been blurred in recent years as the company has moved towards a business model that involves the development of solar power plants that it would incubate and then sell.
Even more recently, it has moved into the so-called yieldco space, which aims to drive consistent cash flow by selling the electricity its wind and solar farms generate to yieldcos SunEdison effectively owns, further distancing itself from the highly competitive solar panel market.
Problem: That model isn’t looking much healthier.
SunEdison largely owns and operates two yieldcos — TerraForm Power (TERP) and TerraForm Global (GLBL). TerraForm Global was performing adequately as of the most recent look, but the numbers posted by TerraForm Power were discouraging. Sales were up by more than 200% on a year-over-year basis, but the loss of 3 cents per share missed expectations for a profit of 18 cents per share by a country mile.
That loss from the yieldco poses a major concern for owners of SUNE stock — they’re the source of the funding for SunEdison, which was needed to continue its growth, and is still needed to support the company’s cash flow ambitions. If neither sales of solar power projects nor the cash flow generated by them is fruitful, there is no viable “plan C.”
One tough quarter doesn’t make a trend, and it remains to be seen if TerraForm Global is starting to feel the same headwind TerraForm Power is. It’s distinctly possible, however, that no structure or arrangement within the solar power industry is viable while oil, gas and coal are so cheap. The growing liquidity concerns may well be merited.
Bottom Line for SUNE
Never say never. And, with SUNE down more than 80% since June’s peak, it’s entirely possible SunEdison is due for a bounce soon, even if it’s just a dead-cat bounce.
Make no mistake though … a play on SUNE stock at this time is a high-risk, high-reward gamble. The key is simply whether or not solar power itself can be profitable versus the (indefinitely low) energy prices created by other sources.
If solar power is going to be viable and profitable in the current cheap-oil environment, however, for SunEdison’s sake it better prove it soon.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
