SunEdison (SUNE) has been burning up this year. This has happened despite having the support of a host of top hedge funds like Omega Advisors, Greenlight Capital and Third Point.
Yet the damage to shareholder value has been severe, with SUNE stock off a grueling 84% to $3.17 (on year-to-date basis).
But perhaps there is an opportunity? Maybe SUNE stock really can stage some sort of comeback?
Well, first of all, let’s get some background on the company: SUNE is, no doubt, a powerhouse in the solar industry. The firm develops, finances and operates a wide array of renewable power plants.
And yes, to leverage the business, SUNE has engaged in lots of financial engineering. To this end, the company spun off two firms — TerraForm Power (TERP) and TerraForm Global (GLBL) — which allowed for tax-efficient distributions of dividends (the companies are known as “yieldcos”). Basically, SUNE focuses on building and selling projects to the yieldcos, which then get long-term contracts that provide for stable cash flows.
Headwinds for SUNE Stock
But there is a problem: the solar industry continues to face extreme downward pressures with pricing. If anything, the plunge in oil prices has been a key driver as renewables have become less attractive. At the same time, the costs of construction of new solar capacity remains substantial.
To get a sense of the impact of these factors, just look at the latest earnings report from SUNE, in which the company posted a staggering loss of $284 million on $476 million in revenues (up only 1.5% on a year-over-year basis).
Now, in the case of SUNE stock, the yieldco strategy has also essentially backfired. With the depressed valuations on TERP and GLBL, there is really not much hope of selling stock to finance new projects from SunEdison.
Yes, it’s an ugly downward spiral.
So given all this, is it any wonder that Wall Street has been dumping SUNE stock?
Not really, although SUNE has taken swift actions to try to shore things up. For example, the company plans to slash quarterly operating expenses to $150 million by the middle of next year as well as reduce the headcount by 15%.
What’s more, SUNE has been selling off various assets, such as with a recent deal in India, and plans to reduce overall construction of new plants. The company even recently had a reshuffling of the senior management, with the SUNE CFO Brian Wuebbels going over to take the CEO spots at TerraForm Power and TerraForm Global.
But such moves have done little to allay fears on Wall Street.
The fact is that SUNE stock is extremely difficult to evaluate, in light of the complex structures and financing arrangements. There is also a whopping $11.67 billion of debt on the balance sheet. With the likelihood of higher interest rates in the near future, there will likely be more pressure on overall liquidity.
So for investors considering SUNE stock, there definitely should be lots of caution.
With oil prices remaining depressed and with the yiedco business model in shambles, there is little here to show that growth will return anytime soon.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.