Let’s project for a minute what the company’s market could be. Today’s solar market is about 30 GW, and given the growth of emerging markets, I think 100 GW is achievable by the end of the decade. If there are 10 manufacturers dominant in the market (probably a high estimate) with equal share, SunPower could sell 10 GW of solar panels and projects.
Costs will obviously fall between now and then, so let’s assume SunPower makes only a $0.10 profit for each watt it produces. That would be a 20% net margin if panels cost $0.50 per watt, an assumption I think is reasonable.
Ten gigawatts times $0.10 per GW is a $1 billion profit annually. Put a 20 P/E on that, and you have a $20 billion company and a $167.86 stock.
Crazy? Maybe. But maybe this is a 10-bagger in the waiting?
What about competitors
Don’t think I’m being fair to competitors? That’s understandable. Let’s look at a few of the big names in solar.
In the preceding analysis, I’ve glossed over debt for SunPower. The reason is that SunPower has $418 million in net debt, and some of that is used to build projects it will sell and to pay advances to suppliers. The bottom line is, SunPower doesn’t have nearly the debt problem some companies have.
But that doesn’t mean investors don’t have similar upside in Chinese companies. Let’s look at the revenue multiple I laid out earlier (2.2-2.8) and apply it to Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE), LDK Solar Co., Ltd (ADR) (NYSE:LDK), and Trina Solar Limited (ADR) (NYSE:TSL).
| Company | Sales (TTM) | Enterprise Value | Net Debt | Current Market Cap |
|---|---|---|---|---|
| Yingli Green Energy | $1.75 billion | $3.85 billlion-$4.9 billion | $1.9 billion | $515 million |
| LDK Solar | $1.15 billion | $2.5 billion-$3.22 billion | $2.7 billion | $239 million |
| Trina Solar | $1.43 billion | $3.1 billion-$4.0 billion | $506 million | $364 million |
Source: Yahoo! Finance.
I think this lays out exactly why I don’t think LDK Solar has a chance to survive without the free flow of money from the Chinese government. But it does show how Yingli and Trina could benefit if they ever turned operations around.
Clearly, Trina Solar would be the best bet of these three, but I still wouldn’t take the risk. Financial conditions are bad in Chinese solar, debt is looming, and operations don’t seem to improve the way SunPower’s have in recent quarters. There’s a reason SunPower is leading the charge, as I wrote last week.
What if I’m wrong?
Sure, any or all of these projections could be wrong. But they put into perspective what the overall possibility is for SunPower investors. It’s important to keep in mind that bankruptcy is also a possibility, or the stock would probably be much higher.
All I wanted to do today is put SunPower’s value into perspective. I think the stock is cheap, and if we compare with other manufacturing companies, the numbers bear that out. But for the market to catch up SunPower needs to continue to improve financial performance. If that doesn’t happen, then all of the multiple analyses in the world are useless.
The article How High Can SunPower Go? originally appeared on Fool.com and is written by Travis Hoium.
Fool contributor Travis Hoium manages an account that owns shares of SunPower and SunPower. He personally owns shares of SunPower and has the following options: Long Jan 2015 $7 Calls on SunPower, Long Jan 2015 $5 Calls on SunPower, and Long Jan 2015 $15 Calls on SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw. The Motley Fool has no position in any of the stocks mentioned.
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