Solar power companies have had an interesting ride in so far in 2016. Despite so many woes, one solar installations company is being featured as a company in which the shares could more than double. Vivint Solar Inc. (NYSE: VSLR) was raised to Outperform at Oppenheimer. This is one of those calls that should remind investors there is no such thing as a free lunch.
Oppenheimer’s Colin Rusch raised Vivint Solar’s rating from a Perform rating and assigned a $7 price target. If Rusch is correct, that represents more than 100% upside from the $3.19 close on Monday.
Vivint recently expanded its term loan facility, a five-year $313 million term. Oppenheimer’s report suggests that Vivint Solar is demonstrating its ability to close large deals in a relatively short time frame. The report noted that that this residential solar energy system installer will still have to raise additional tax equity for the fourth quarter of 2016 and 2017 deployments. Rusch expects that the company will close a facility in a timely manner, considering the wide availability of tax equity.
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Oppenheimer’s Outperform rating was from valuation support from Vivint’s existing portfolio, and from a more conservative strategy that emphasizes cash-on-cash returns and sustainable growth. The firm also pointed out that there is a potential for improving unit economics based on lower equipment costs and a disciplined sales strategy.
Vivint Solar installed 61 MW (megawatts) in the second quarter of 2016, versus guidance of 60 MW, and down 6% year over year. Total blended cost per watt was $2.94, with an install cost $2.13 per watt, sales of $0.56 per watt and G&A of $0.25 per watt. Bookings of 74 MW were said to be flat year over year and up 12% from the first quarter of 2016. Revenue and GAAP EPS were $34.9 million and $0.11, versus consensus estimates $25 million and −$0.37.
As far as what to look for in the rest of 2016, Vivint Solar now expects fiscal year 2016 MW installations to be under the prior 2016 guidance of 260 MW. This is as the company is focused on strategic initiatives to enhance value retained per watt.
The base case assumption here is that Vivint will have modest installations growth from 2016 to 2018, along with a continued reduction in the installed cost per watt. Catalysts for the upside are tracking installation and cost metrics and lower financing costs. The upside would come from new/unanticipated policy support or where the cost of capital remains at the current level or declines even more. Downside issues that would hurt the bullish case would be if economics bring compression or limited distribution of solar loans, or if the company does not introduce an energy storage product.
Rusch’s thesis was as follows:
In our view, Vivint Solar’s low cost structure and strategic approach to growth in MW installations will help lower capital costs through 2018, which positions the company to benefit from what we believe could be a robust North American solar installation market through 2018.
Oppenheimer’s $7 price target is based on the $3.49 net value of existing portfolio contracted cash flows, at a 6% discount rate. The firm then applied an 18 times multiple for its adjusted free cash flow estimate for projects deployed in 2018 to value the development business at $3.38 per share.
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Vivint Solar shares traded up about 12% at $3.57 just after Tuesday’s opening bell. It has a 52-week range of $2.16 to $14.04 and a consensus analyst price target of $4.95. Vivint came public late in 2014. Its IPO was for 20.6 million shares, with a price of $16.00 per share.
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