Which Downstream Solar Company Is Trading at a Discount?



Relative valuation

A company’s relative valuation helps us to compare its value to those of its peers. Specifically, the enterprise value-to-sales (or EV-to-sales) ratio represents the value created per dollar of sales made by a company during a year. A higher EV-to-sales ratio would imply that a company is overvalued compared to its peers.

As the downstream solar industry is still in its growth phase, operating losses are common among incumbent players. The EV-to-sales ratio is thus useful for comparing the values created from the different companies’ operations. However, these multiples should be considered with caution: a higher EV-to-sales ratio also implies a higher value addition for the company from higher sales in the future.

Among the downstream solar (TAN) companies under review, Vivint Solar (VSLR) has the highest EV-to-sales value of 13.23x. It’s followed by SolarCity’s (SCTY) 10.93x. SunPower’s (SPWR) current EV-to-sales ratio stands at 1.80x, and Sunrun (RUN) has an EV-to-sales ratio of 3.57x.

Moving ahead, analysts expect the EV-to-sales ratios of all major downstream solar players to fall in 2016 and to fall even further in 2017.

Article continues below advertisement

Analysts’ price targets

After the announcement of these companies’ 2Q16 earnings results, analysts revised SolarCity’s and SunPower’s price targets downward. On September 13, 2016, analysts had a consensus 12-month target price of $21.7 for SolarCity and $15.4 for SunPower. Analysts gave Sunrun and Vivint Solar consensus 12-month target prices of $10.6 and $5.6, respectively.

Return potential

Considering the stocks’ September 13 closing prices, Sunrun had the highest return potential of 88% among its peers. It was closely followed by Vivint Solar’s 87% return potential. According to analysts’ recommendations, SolarCity and SunPower had return potentials of 27% and 74%, respectively.

In the next and final part of this series, we’ll discuss the 3Q16 megawatt installation guidances of the major downstream solar players under review.


More From Market Realist