STRI STR Holdings Inc (CE)

SunPower Corporation (SPWR) announced that its manufacturing cost reduction initiatives remain on track, including its step reduction program, which will reduce the number of steps in the manufacturing process by 15% by the end of 2012.

As a result of the company's continued cost reduction progress at its cell fabrication plant (Fab) 2 and 3 manufacturing facilities, it made the strategic decision to consolidate its Philippines manufacturing operations into Fab 2 and begin reorganizing Fab 1. This decision will enable SunPower to rationalize its operating expenses, improve supply chain efficiency and lower its manufacturing cost per watt through scale advantages. The reduction of approximately 125 megawatts of nameplate capacity at Fab 1 will be partially offset by further improvement in yields and equipment efficiency in Fab 2 and Fab 3.

Combined with additional yield and equipment efficiency improvements, the company expects to achieve its cost goal of approximately 86 cents per Watt by the end of 2012.

SunPower also expects to take pre-tax GAAP charges in restructuring totaling $51 million to $69 million, primarily non-cash asset impairment charges of $40 million to $54 million, and other cash-based associated costs of $11 million to $15 million, for the closure of Fab 1. Of the pre-tax GAAP charges totaling $51 million to $69 million, $47 million to $63 million will likely be recorded in the second quarter of fiscal 2012 and the remainder in the following quarters.

SunPower is a vertically integrated solar company with presence across the entire solar value chain. The company designs, develops, manufactures, markets and sells high-performance solar electric power technology products, systems and services worldwide for residential, commercial and utility-scale power plant customers. The company's semiconductor-based solar cells and solar panels, which convert sunlight into electricity, are manufactured using proprietary processes and technologies. SunPower is largely owned by French oil major Total S.A. (TOT).

SunPower is witnessing falling ASPs and margins in its residential and small commercial markets segment which accounts for approximately two-thirds of its topline. We expect the trend to continue unabated in the near future with valuation further restrained by the higher cost structure of the company compared to its peers besides subsidy roll-back risk in Europe and foreign exchange risk.

SunPower expects net loss to be in the range of 60 cents to 45 cents per share in the first quarter of fiscal 2012, and its adjusted loss to be in the range of 20 cents to 5 cents per share. The company projects revenues of $2.6 billion to $3.0 billion for fiscal 2012 and expects to achieve break-even only at the fag end of fiscal 2012.

SunPower operates in an industry that has moved from a supply-driven to a demand-driven environment, with increasing competitive pressure, as the photovoltaic industry's total manufacturing capacity exceeds the current demand for solar modules. We believe, going forward, the trepidation would continue throughout 2012, as Germany and Italy reduce subsidies. This would slow demand further dragging the overcapacity situation in the industry.

SunPower's solar module ASPs dropped sharply in the Residential and Commercial segment due to an industry-wide oversupply glut. The company's success in the future will depend on its ability to scale its manufacturing capacity with lower cost per watt. SunPower expects to trim its efficiency adjusted production cost to 86 cents per watt by the fourth quarter of fiscal 2012. However, we feel this is still on the higher side when compared to its China-based solar peers.

A significant portion of SunPower's revenue is denominated in euros. As the company expands its manufacturing operations and distribution network internationally, its exposure to fluctuations in currency exchange rates is on the rise. Fluctuations in currency exchange rates could have an adverse impact on SunPower's financial performance and operations.

A substantial portion of SunPower's construction contracts are fixed price contracts that may be insufficient to cover unanticipated or dramatic changes in costs over the life of the project. As a result, the company will only be able to make a profit if costs stay within the contract.

Concerned by the lower margins in residential and commercial segments and expected fall in ASPs in 2012, we maintain our long-term (6+ months) Underperform recommendation on vertically integrated solar manufacturer SunPower.

SunPower however is not alone in facing the doldrums rife in this sector given the oversupply gut and falling demand. Its peers like STR Holdings, Inc. (STRI) also retain a long-term Underperform recommendation.

 
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