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Sunedison (SUNE) Tries To Recover As RBC Looks On The Bright Side

Sunedison shares continued to tumble this morning, falling by more than 13% in premarket trading before bouncing suddenly not long after the markets opened. The stock was down 3.06% at $4.75 per share as of this writing but was rising. It seems the stock will bounce around quite a bit today.

Sunedison stock SUNE down
Via S&P CapIQ

Sunedison’s problem was its disappointing earnings results earlier this week, and both buy-side and sell-side analysts are cutting their price targets. The firm posted sales of $476 million and losses of 91 cents per share. Analysts were looking for $452 million in sales and losses of 60 cents per share.

Why were Sunedison’s 3Q earnings weak?

UBS analyst Julien Dumoulin-Smith has a Neutral rating on the solar company and has slashed his price target from $9 to $6 per share. He highlighted some factors he believes weighed on Sunedison’s results, causing the miss.

First, he said the company’s retained projects had lower margins than expected at 26 cents per watt compared to the margin guidance of 36 cents per watt for 2016. Second, he said management was confident on the pending deal with Vivint Solar but emphasized that they just didn’t have enough time to close a deal with the company. He believes that if the deal is renegotiated, investors would see it positively, although management said there was “no walking.”

Also the analyst noted that operations and management refunds to TerraForm Power come on costs that are more than what had been budgeted for the FirstWind portfolio. Further, he said Sunedison’s operating expenditure trends at $361 million were higher in the third quarter, although management did make some adjustments. Management had originally guided for full year operating expenditures of $590 million compared to the second quarter of fiscal 2016 run rate target of $150 million, said Dumoulin-Smith.

Further, he sees risk to the arbitration being pursued by the LAP owners, which are BTG, P2Brasil and GMR. The group requested that Sunedison pay at least $150 million in damages because the deal they had was canceled. Both sides blame each other for the unraveling of the deal, but the UBS analyst sees this as a negative for Sunedison shares.

Sunedison moving in the right direction?

RBC Capital Markets analyst Mahesh Sanganeria sees things quite differently. The analyst has an Outperform rating on Sunedison but did trim his price target from $24 to $20 per share in the wake of this week’s earnings report. He thinks Sunedison is moving toward “a more healthy and sustainable growth trajectory” by cutting its guidance for megawatts, focusing more on third-party sales and cutting operating expenditures.

In fact, he believes the company’s third quarter earnings report demonstrates that the company is making progress. He noted that the company reported a big increase in third-party sales and a significant reduction in operating expenditures. He expects the company’s stock to remain volatile for a while until the closing of pending acquisitions. The Invenergy and Renova acquisitions are expected to close in the fourth quarter, while the acquisition of Vivint is expected to close in the first quarter of 2016.

Sunedison benefits from third-party sales

During the third quarter, Sunedison had 640 megawatts, beating the high end of management’s guidance range of 540 to 600 megawatts. The company revealed that it sold 106 megawatts worth of third-party projects, which was significantly higher than the guidance of 50 to 70 megawatts. Third-party sales amounted to $83 million, with revenue received on 41 megawatts of the project.

Gross margin on those sales was 36 cents per watt, and even though Sunedison’s share price remained volatile during the third quarter, it did retain 534 megawatts in projects, again beating the guidance of 490 to 540 megawatts for the quarter. Also the solar company had 2.9 gigawatts worth of projects under construction, marking a 1 gigawatt increase sequentially. It had 7.9 gigawatts worth of projects in the pipeline and a backlog of 5.5 gigawatts.

Sunedison changes guidance

The RBC Capital analyst noted that Sunedison management reduced their guidance range for the full year to between 2.15 and 2.25 gigawatts but left the midpoint the same at 2.2 gigawatts. Along with this, however, he pointed out that third-party sales guidance almost doubled to between 540 and 565 megawatts, compared to the previous outlook of 260 to 300 megawatts.

The retained megawatt target fell to a range of 1,610 to 1,685 megawatts. Sanganeria believes the increase in third-party sales is Sunedison’s response to the problems in the YieldCo market. The company continues to target a gross margin of 35 cents per watt and operating expenditures of 17 cents per watt for next year.

You may remember that David Einhorn of Greenlight Capital has been firmly in the buy-side camp on Sunedison for some time.