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Can Sunrun Outperform Its Peers in Fiscal 2016?

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Sunrun: 2016 guidance

Moving ahead, Sunrun (RUN) expects to deploy about 285.0 megawatts (or MW) in fiscal 2016, compared to 202.9 MW deployed in fiscal 2015. The company expects its Sunrun built business model, in which Sunrun is directly involved, to grow at around 100% growth rate in fiscal 2016.

The company maintains the target of $1 per watt of net present value (or NPV) during fiscal 2016. However, the company expects to deploy 56 MW during 1Q16 against 68 MW deployed during 4Q15.

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This is mainly due to Sunrun’s exit from the Nevada market as a result of recent changes in a regulatory regime, which includes the elimination of net metering system in that state. This decision by the Nevada Public Utilities Commission could also impact other downstream solar (TAN) players like Vivint Solar (VSLR), SolarCity Corporation (SCTY), and the downstream revenues of SunPower Corporation (SPWR).

Sunrun anticipates an increase in gross profits and gross margins during fiscal 2016 as capacity expansion in direct business could help in bringing down creation costs further.

Analysts’ expectations

After 4Q15 earning results, analysts revised down their future revenue and EBITDA (earnings before interest, tax, depreciation, and amortization) estimates for Sunrun. For the coming quarter, analysts expect a 3% decrease in revenues compared to their pre-4Q15 earnings release estimates.

However, five out of seven analysts covering Sunrun rated the stock a buy with a consensus 12-month target price of $13.43 as of March 24, 2016. Considering the closing stock price of $6.33 on March 24, 2016, the stock has a return potential of about 112% according to analysts’ estimates.

Our analysis

Moving ahead, it is important for Sunrun to keep up its growth rate while managing its operating costs. Sunrun’s installation cost per watt is relatively higher when compared to its peers. The expansion of direct built-in business is crucial for Sunrun in the short term.

The direct built-in business could increase Sunrun’s gross margins by reducing its installation costs. In the long term, residential electricity rates of traditional utilities and environmental regulations will determine Sunrun’s growth.

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