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Which Downstream Solar Company Is Trading at a Discount?

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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.

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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.

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