The Sunrun (RUN) stock has declined due to a weak outlook for FY’16 and the changes in the net metering law in Nevada. The company’s Q4’15 results were decent with less than expected losses and strong bookings growth. The company remains the largest residential installer after SolarCity (SCTY) in US and should benefit from the growth expected in the US residential market. Though the stock performance looks weak currently, I think it should recover once the Nevada side effects start to fade out and the market starts taking the bigger picture of the industry into account.
Residential solar companies can gain a competitive advantage by lowering the cost of installation. Solar plus energy storage will become cheaper than retail grid prices by 2020. It is no longer a question of if this will happen, but a question of when this will happen. Solar energy in US has immense potential to grow with the current penetration at just 1% of the overall electricity generation. I feel it is a good opportunity to buy the stock taking advantage of the short term reverses. Residential installations in the US will continue to grow strongly over the long term and Sunrun will be a key beneficiary as it is amongst the few top installers in the country.
Why Sunrun is a buy, despite significant losses in stock value?
Amongst the largest installers in USA – Sunrun is the second largest residential installer in USA after SolarCity. Its installation cost has also improved to $2.33 per watt from $2.35 per watt in the last quarter though is still higher than SolarCity’s. Sunrun expects to grow by 40% in the next year as against SolarCity’s 44%. Both the companies suffered from Nevada’s adverse ruling. But the industry has lots to cheer about with the ITC being extended for another 5 years. I think the utilities reaction in Nevada was expected as solar energy is negatively affecting their bread and butter business.
Solar energy is becoming more mainstream with each passing year. Today there are only a few prominent solar states in the US, but soon more starts such as Florida, Texas and others will become high growth regions as solar energy becomes competitive. Investors should also remember the end game, when the solar plus energy storage becomes cheaper than a grid. Utilities will have nothing to fight with as customers will completely go off grid.
US residential market is poised to grow – The solar industry is expected to generate 200,000 solar jobs in USA by 2016 end, making it one of the largest employers in the country. Though Nevada PUC recently changed the their net metering laws increasing the charges on solar home owners, solar energy in the US will continue to grow as the other states continue to increase their solar adoption. California maintained its retail rates for rooftop PV. Arizona had recently increased the monthly fee by $5, but had not made any drastic changes against the solar industry. Installations reached 7.3 GW in 2015 in USA, fuelled by booming residential installations and a strong utility pipeline. US residential installations crossed 2GW mark in 2015 itself. It is increasing at a rapid rate as can be seen from the table below.
Quarterly Residential Installations in US
| Quarter | Residential | Total | As a % of Total |
|---|---|---|---|
| Q1 – 2015 | 400 | 1329 | 30.10 |
| Q2 – 2015 | 463 | 1393 | 33.24 |
| Q3 – 2015 | 519 | 1361 | 38.13 |
| Q4 – 2015 | 717 | 3177 | 22.57 |
New Solutions and partnerships will increase growth – Sunrun launched a solar energy storage product – Sunrun BrightBox . This solution was launched for residential customers in Hawaii, where grid integration and stability have become major issues. This will increase customer savings by generating solar power during the day and storing the excess electricity for use at night. The BrightBox will use Tesla’s (TSL) home battery technology.
The company expects to launch similar products for other USA states later this year. Sunrun also launched mySunrun, which will enable customers to interact with their home solar system in January. Solar Energy plus storage (WILL LINK) is set to become a big growth industry in the coming decade, with advancement in technology and reduction in costs. Solar storage already sees rapid growth in Germany and Japan, where the electricity costs are extremely high
2015 was marked by strong growth – For the full year 2015, bookings increased by 85% and megawatts deployed increased 76% annually. In fourth quarter itself, bookings more than doubled from the same time last year. Estimated nominal contracted payments remaining as of December 31, 2015 was $2.4 billion as compared to $1.6 billion in the prior year period. The retained value as at the end of December’15 also increased 50% to $1.5 billion. Total revenues increased 53% annually to more than $304 million in FY’15.
Sunrun’s performance has improved dramatically over the last 3 years
| in $ million | 2013 | 2014 | 2015 |
|---|---|---|---|
| Revenue | 55 | 199 | 305 |
| Gross Profit | 12 | 25 | 24 |
| Net Income (before preferred dividends) | -1 | -71 | -28 |
The company successfully closed a $250 million credit facility, which will support expected volume and liquidity needs for the year.
Low valuations provide a good entry point
The company has a market capitalization value of $718 million, when compared to SCTY’s value at $3 billion. The valuation multiples also look cheap with P/S and P/B of 1.3x, when compared to the industry average and SCTY’s 7.4x and 3.4x respectively. The stock is undervalued in my opinion given its innovative product ideas and the massive potential in the US market.
Stock Performance
SUNRUN is currently trading at around $7 which is 50% below its 52 week high price. The stock price shot up following the ITC extension in December end, but declined again due to the Nevada solar price revision in January 2016. The stock has given relatively better returns when compared to peers like SolarCity and Vivint Solar (VSLR) in 2015. The stock price has fallen due to weak installation numbers, following the Nevada ruling. However, the USA residential market was successful in installing more than 2 GW in the last year and is also poised to grow further. I think the stock price should recover, once these companies start adjusting with the post-Nevada side effects.
