California's mandate for new home rooftop solar seen among key catalysts
Shares of SunPower (SPWR) and SunRun (RUN) are on the rise after Goldman Sachs analyst Brian Lee upgraded the stocks to Buy as he anticipates "volume tailwinds" in the second half of 2019 given the recent signs of strength in the sector's financing environment. Also higher is SolarEdge (SEDG) after the analyst upped the stock's rating to Neutral as part of a broader research note on U.S. residential solar stocks.
SOLAR SHUFFLE: Goldman Sachs' Lee told investors in a research note that he is incrementally positive on U.S. residential solar stocks and sees a number of tactically attractive buying opportunities ahead of the second half of 2019 volume tailwinds and amidst recent signs of ongoing strength in the financing environment. The analyst upgraded SunPower and Sunrun to Buy from Neutral and SolarEdge to Neutral from Sell, and raised his price target on SunPower to $11 from $6, Sunrun to $20 from $15 and SolarEdge to $52 from $35.
Among the key catalysts, Lee cited initial volume traction stemming from the 2020 California New Homes Mandate, 30% ITC timing and potential pull-forward, as well as a constructive financing backdrop highlighted by declining cost of capital. California's mandate for new home rooftop solar will require every new home built in the state starting next year to have a solar system, with Lee estimating the requirement to add 350MW-700MW opportunity for the sector which would account for 15%-30% increase in year over year volume. The analyst also expects investors to embrace any pull-forward in demand from the 30% federal ITC for solar phasing out to 26% starting in 2020, particularly as volume ramps start to materialize and any potential installations upside begins to serve as catalysts for the group.
BUY SUNPOWER, SUNRUN: Goldman Sachs' Lee acknowledged that his call to upgrade shares of SunPower can be seen as somewhat contrarian given investor sentiment remains relatively tepid on the shares based on his conversations. Nonetheless, the analyst sees multiple tailwinds for the company in coming quarters, including new California homes volume, improving margin/mix and improving leverage rations on the back of an EBITDA inflection.
Also more bullish on Sunrun, Lee said that his Buy rating on the shares is predicated on strong growth in the residential solar market, a stable lending environment with upside from refinancing, and the presence of key differentiators, such as Brightbox, dynamic pricing, and simplified reporting metrics.
MOVING TO THE SIDELINES ON SOLAREDGE: The analyst pointed out that he sees the absence of competition from Huawei likely preventing the sharp market share and margin deceleration that he had forecasted previously for SolarEdge, prompting an upgrade to Neutral. He also noted that since being added to the firm's Americas Sell List, SolarEdge shares are up 236%, which he attributes primarily to a lack of competitive pressure and continued share gains.
PRICE ACTION: In afternoon trading, shares of SunPower have jumped almost 27% to $10.50, while Sunrun's stock has gained about 8% to $18.40. Also higher, shares of SolarEdge have advanced almost 6% to $59.79.