As oil has plunged, so have share prices for a variety of the leading players in solar energy. Solar firms like First Solar (FSLR) and SolarCity (SCTY) now sit closer to their 52-week lows than highs. But of the major solar stocks, one has taken it on the chin even harder — SunEdison (SUNE).
In just over a month, SUNE stock has fallen more than 60% from just over $30 to around $11 per share. And while some of that drop could be justified, we’ve now hit the point where SUNE is starting to look like a tantalizing value among the major solar stock players. And indeed, SUNE stock has rocketed 18% higher in the last five trading days.
For investors willing to take one a bit of risk, SUNE could be one of the brightest rays of sunshine in the solar sector.
SUNE’s Big Drop
Stocks usually don’t drop 64% over the course of a month without any reason, especially when the sector is humming right along. Like many companies, SunEdison’s currently cloudy skies are a result of debt and taking on too much at once.
As pricing for solar panels sits at decade lows (thanks to the ongoing glut of cheap Chinese modules), SunEdison took a page out of rival’s playbooks and began building grid-scale solar projects.
This sort of utility-focused business has worked well for FSLR and SunPower (SPWR), two solar firms with loads of experience and deep pockets.
After spinning out wafer producer SunEdison Semiconductor (SEMI), however, SUNE needed some serious funding to keep the ball rolling. So it tapped the debt market in a big way.
SUNE has about $17 billion in total liabilities on its balance sheet — with around $9 billion of that in long term debt. But it wasn’t done piling on debt. Throughout August, SunEdison announced a series of new funding initiatives, including launching a convertible preferred stock offering and partnering with the vampire squid itself — Goldman Sachs (GS) — on a new $1 billion acquisition fund. This debt doesn’t include any of the debt held by its two YieldCo’s either.
The YieldCo model is based on cash flows, collecting dividends and using those cash flows to purchase completed solar plants from the sponsoring company. The more debt that these firms accumulate (which continues to be added), the less cash for SUNE to buy plants or pay a dividend.
Even worse, a lot of SUNE, TERP and GLBL’s debt is floating rate. That’s really going to stink when (or if) the Fed raises rates.
And all of this debt has changed the asset mix at SUNE. So much so, that some analysts and investors are confused by the structure.
SunEdison recently made a $2 billion for residential solar installer Vivint Solar and First Wind, a developer of wind farms. Add in its recent foray into emerging markets and it’s easy to see why some investors have said that SUNE is taking on too much at one time.
With investors’ risk-off attitude in the markets currently, SUNE stock didn’t have a chance against some of its more conservatively managed peers.
SUNE Stock May Be a Big Buy
With nearly $1.29 billion in cash as of the end of last quarter, the problem for SUNE isn’t keeping the lights on … the problem is kicking the can long enough for its cash flows and solar to start recording profits. Both of those fronts may come sooner than later.
As we stated before, solar installations across both utility-sized and residential facilities are surging. This is in spite of the fact that natural gas and coal prices are in the toilet. Utilities and consumers are choosing solar, and in some instances without the need for subsidies. The growth projections are immense, and it looks like the sector will hit those high estimates.
SunEdison has positioned itself to take advantage of the growth in both subsectors of the solar market. In residential, Vivant is the second-largest installer. In utility sized, TERP is a guarantee buyer for its grid-scale assets. It’s very much a win-win for SUNE.
As for the cash, it’s coming. According to SunEdison’s CEO, Ahmad Chatila, SUNE’s portion of the cash flows generated by TERP and GLBL via long-term power selling agreements will begin to flow as early as the end of this year.
That’s about a year or two earlier than initial estimated, which means that SUNE will become profitable and actually have the ability to pay down some of this high debt. Or at least give it the flexibility to refinance it into fixed interest rate debt.
So what we have is a situation where impatient investors jumped ship at the first sign of distress. Sure, that debt is an issue, but not a 64% decline kind of issue.
The Bottom Line
For investors willing to stay the course for a bit, SUNE stock could be one of the biggest values in the high sector. And retail investors wouldn’t be alone in SUNE shares.
Directors and insiders have made some pretty large purchases over the last few weeks, and billionaire hedge fund manager Steven Cohen just announced an increase of his total stake to 15.95 million shares, or about 5.1% of SunEdison’s outstanding shares.
Yes, SunEdison has debt. That’s not a secret. But the recent drop in SUNE stock was an overreaction, especially since the forecast is a bit sunnier than first reported.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.