I’m Still Bullish on SUNE Stock
As we begin 2016, I’m keeping a close eye on SunEdison, Inc. (NYSE:SUNE), a renewable energy firm with a litter of subsidiaries. It looks to me like SUNE stock is trading far below its intrinsic value and investors are blind to its potential.
It’s hard to blame them. After all, renewable energy stocks got a raw deal in 2015. Some firms were less than efficient and investors were right in aiming at them, but many more were simply caught in the crossfire. It wasn’t company-specific issues that dragged down SunEdison’s stock, but rather macro trends in the energy industry.
We all saw oil and natural gas prices crater last year—that wasn’t just a bad dream. Demand for renewable energies was incredibly strong when traditional energies grew overpriced, so it was devastating when that trend reversed so sharply.
Oil firms cut back on expansion plans and saw their stock prices decimated. The same thing happened to natural gas companies and then to solar energy stocks. But why? Were the fundamentals of solar energy stocks really that wounded by the price slump?
The SunEdison Model is a Classic
As a close observer of financial markets, I can tell you that rational expectations, as economists call them, are a completely fictional way of thinking about human behavior. The idea that markets were behaving logically by destroying SUNE stock is to assume the company’s underlying fundamentals changed as dramatically.
Does anyone believe that is true? Don’t get me wrong; there is well-deserved concern over short-term cash flow, since some demand will obviously gravitate back towards traditional energy during the low price hiatus. But I’m wondering about the actual business of renewable energy.
SunEdison builds huge installations and sells them to its two subsidiaries, TerraForm Power, Inc. and TerraForm Global, Inc. Both these firms are known as “yieldcos,” which effectively means they are designed to simply operate the projects after completion and pass the profits through to investors.
It’s a brilliant system for spurring growth in the renewable sector. The risk-heavy development project is mitigated by the assurance of a buyer and the buyer is built to funnel its profits to the shareholders. This model had the industry mesmerized—that is, until last year’s crash in energy prices.
Why SUNE Stock Could Keep Rising
Does that mean the model of “developer with yieldcos as subsidiaries” is a dead model? I don’t see why that should be the case. The value of those projects may be temporarily depressed, but that doesn’t mean they’ll stay low forever.
A Gallup poll from early 2015 shows that a majority of Americans believe solar energy should play a bigger role in the country’s energy distribution. The split was bipartisan, with even 70% of Republicans in favor of the solar industry. (Source: “U.S. Support for Nuclear Energy at 51%,” Gallup, March 30, 2015.)
In light of such positive public perception, the odds are pretty strong that solar power will continue its upward trajectory. The industry was rocked by an external shock, that’s true, but its detour was only temporary. And that’s good news for SunEdison, Inc. and SUNE stock.