Is It Time to Give Up on SUNE Stock?
One of the Street’s darling renewable energy companies SunEdison, Inc. (NYSE:SUNE) and its two spin-offs, TerraForm Power, Inc. (NASDAQ:TERP) and TerraForm Global, Inc. (NASDAQ:GLBL), reported a meager performance for the latest quarter, followed by their stocks’ massive freefall on Tuesday. SUNE stock plunged more than 22% in just one day, taking down with it the two yieldcos stocks and a number of other key players in the solar industry.
Here’s why SUNE stock was doomed from the beginning…
This Is Bad News for SUNE Stock
Primarily, the problem with SunEdison goes beyond its business model to its very complex financial model. The company has been the pioneer of two SPV-like publicly traded entities, the yieldcos, which it uses for financing projects and for parking some of its debt load. In turn, the yieldcos have been receiving cash flows to pay out dividends to their respective stockholders.
Everything would have been fine had the parent company been profitable. But it isn’t, thus putting not only SUNE stock investors in jeopardy, but also putting shareholders of the two TerraForm yieldcos, TERP and GLBL, at risk due to their close ties to the parent company. The combination has, and may continue to, hit owners of SUNE stock hard.
Secondly, SunEdison’s aggressive strategy to continue to acquire other unprofitable companies in an attempt to emerge as a bigger force in the renewable energy industry has failed miserably. Management’s increased focus on external acquisitions, as opposed to its internal business operations, has become a serious threat to the company’s survival. SunEdison has been on an acquisition spree for more than a year now, burning cash on solar and wind energy companies, but this spree has failed to return a penny in profits.
Chart courtesy of www.StockCharts.com
Management is still paying for the First Wind acquisition from last year, with the payments expected to continue through to next year. At the same time, they’re planning to close two other acquisitions of Vivint Solar, Inc. (NYSE:VSLR) and the privately held Invenergy.
The market was already forewarned of SUNE stock’s inevitable fate. (Read “Here’s Why David Einhorn is Wrong on SunEdison, Inc.”) The company is unable to generate positive cash flows and has been using debt to finance new projects at the current low interest rates. The company has guided lower for total gigawatt capacity for 2016, indicative of a slowdown in demand. The residential solar sector, in particular, has been returning lower installations.
Additionally, SunEdison will be facing troubles receiving dividends on its special incentive distribution rights (IDRs) as the yieldcos are starting to face liquidity issues. SunEdison is now deciding to cut down on sales of its assets to its yieldcos, which have also failed to deliver on their promise.
I predicted before that the hubris over the future performance of these yieldcos is unwarranted. In the long run, the spun-off yieldcos must perform as the parent company performs. That analysis has turned out to be largely true. TerraForm Power returned a loss, as opposed to expected profits, and TerraForm Global, likewise, missed estimates.
I, for one, would not narrow my focus solely on the yieldcos’ dividend yield while completely overlooking their deteriorating financials and plunging stock prices. It has become pretty evident that SunEdison’s yieldcos will be facing troubles going forward and the recent quarterly numbers certainly raise questions about their future liquidity.
Bottom Line on SUNE Stock
With the possibility of a rate hike back on the Fed’s table, future debt-financed buyouts will become exceedingly impossible for this company. Should the Fed sound the alarm, SUNE stock will be heading further south. It wouldn’t surprise me if the company issues more equity to cover up for the rising debt and piling losses, which would cause a further dent in SUNE stock.
With David Einhorn’s big investment in SunEdison, it’s high time Greenlight Capital moves for some serious hedge fund activism. Prospective investors shouldn’t fall for the dip so easily.
In a nutshell, I’d steer clear of SUNE stock.