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SunPower Inks Deal to Buy Stake in Solar Cell Joint Venture

Zacks

SunPower Corporation SPWR has signed a contract with AU Optronics Corp. to acquire the latter’s stake in the companies’ Melaka, Malaysia-based solar cell production joint venture. The transaction is expected to close by the yearend, subject to requisite approvals.

Details of the Agreement

SunPower will pay AU Optronics $170 million over the next four years under a stock purchase agreement to buy the latter’s stake in the 800-megawatt (“MW”) fabrication facility.

This stake acquisition is expected to give SunPower complete control over the company’s best-performing solar cell facility, allowing it to undertake technological upgrades and cost reductions as and when market conditions are conducive. Note that the facility was constructed with significant room for capacity expansion.


SunPower has also signed a deal to supply 100 MW of the E-series solar panels to AU Optronics, while the latter continues to be the wafer supplier for SunPower.

Overview

Increasing awareness of the drawbacks of fossil fuels, primarily coal, is spurring the demand for renewable sources of power generation, particularly solar. Per a U.S. Energy Information Administration report (EIA), total renewables used in the electric power sector of the U.S. are expected to increase 9.5% in 2016 and 5.8% in 2017.

Moreover, consumption of renewable energy, other than hydropower, is forecasted to grow 11.8% in 2016 and 11.1% in 2017. Solar energy will constitute 1% of the total U.S. utility-scale generation in 2017, indicating immense room for growth. Solar companies are thus benefitting significantly from the boom.

To tap the growing demand for solar products, SunPower has already undertaken several initiatives to strengthen its existing operations and ramp up production volumes. Within Asia, the company began the construction of the 27-MW Nanao project in Japan with completion slated for 2016 end. It has also clinched a 47-MW panel supply agreement in the country for an under-construction project.

In China, the company has two joint ventures, and continues to pursue both manufacturing and project development activities. With over 300 MW deployed to date, SunPower’s JV ecosystem is gradually gaining a solid footprint in the world's largest solar market.

Costs & Debt a Concern

In second-quarter 2016, the company’s total operating expenses increased 11.9% year over year. Further rise in costs could hurt the company’s margins, which would hamper its growth trajectory over the long term. Its gross margin in the second quarter contracted 450 basis points year over year.

Further, SunPower is presently grappling with a large amount of debt, around $2.04 billion, resulting in a debt/capital ratio of 55.6%. This figure is way above the industry average of 34.1%. If SunPower is unable to sell the solar projects associated with the debt, its cash flows will be severely hit.

Zacks Rank & Key Picks

SunPower carries a Zacks Rank #5 (Strong Sell). A few better-placed stocks in the solar space include Sunrun Inc. RUN, Sunworks, Inc. SUNW and Vivint Solar, Inc. VSLR. While Sunrun sports a Zacks Rank #1 (Strong Buy), both Sunworks and Vivint Solar carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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