Sunrun (NASDAQ:RUN) completed its all-stock purchase of Vivint Solar on Oct. 7, making it the third-largest U.S. solar operator. Sunrun stock looks like it will be a winner after this merger, as now it has a fighting chance of producing profits. That is a rarity in the solar industry.
Sunrun’s presentation about the merger, which was announced on July 6, shows that the combined company will have more than 500,000 customers. The firm will also have over 3.4 gigawatts of combined solar installations.
A Turnaround Driven by Size
The company makes money by operating solar systems on behalf of its customers and by selling solar systems. Right now only about 3% of homes in the U.S. have solar systems. The company estimates that by 2029, that percentage will climb to 13%. That implies significant revenue growth for Sunrun over the next nine years.
The company makes money by offering electricity for below-market prices to its customers. Sunrun installs the solar panels at little to no cost to customers, and they agrees to lease them for 20 to 25 years.
Barron’s reports that, after combining, the two companies will be large enough to become profitable. That would obviously be very positive for Sunrun stock. Last quarter, the company lost $13.5 million on $181 million of revenue.
More importantly, moving into the black might help the company stop its cash-flow losses. Those losses, in turn, are forcing it to continuously add more debt.
For example, in the first six months of 2020, Sunrun had cash flow losses from operations of $152.3 million. And the company is always buying new solar systems. That cost it another $364.4 million during the first six months of 2020.
Therefore , in that period, it burned over $516 million of cash. It took on $197.2 million of debt and sold stakes in joint ventures and partnerships for $375 million.
Over the years, Sunrun has built up a lot of debt. For example, as of June 30, it had over $2.3 billion of debt and lease obligations.
Sunrun estimates that cost synergies of $9o million will allow the company to start generating positive net income. I suspect, however, that it will be a while before its cash flow turns positive.
What to Do With Sunrun Stock
Sunrun’s acquisition of Vivint resulted in an increase of about 45% in its number of shares outstanding. As a result, Sunrun stock now has a market capitalization of $17 billion on a pro forma basis.
Barron’s argues that this will allow the company to attract institutional investors that could not invest in stocks with small market capitalizations.
Moreover, Sunrun plans to announce its Q3 results on Nov. 5 after the market closes. It will be important for investors to see the combined company’s Q4 guidance.
Sunrun needs to start showing a pathway to profitability, positive free cash flow, and debt reduction. That will allow investors to estimate when the combined company will be able to grow its business without having to rely on third-party joint ventures and debt increases.
The problem for new investors in Sunrun stock is that it is already up 297% in 2020. And in the past year, it has jumped 267%.
A number of solar stocks have rallied recently in anticipation of a potential Biden administration being more favorable to renewable energy.
However, on Oct. 27 UBS downgraded Sunrun stock , along with a number of other solar plays, to “sell.” In addition, TipRanks reports that the average price target of ten analysts following the stock is $59.10. That is about 10% above the present price.
Marketbeat.com reports that 12 analysts have an average price target of $59.75.
Before investing in Sunrun stock, consider what the potential new Administration is likely to do. Those considering buying the shares should also take into account the outlook that Sunrun provides on Nov. 5 for the combined company.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
