The Great American Debt Debacle and why I like SunPower (SPWRA)

Author: Jack Gindi, Beckerman Institutional

Covestor model: Flexible Value

Disclosure: Long SPWRA

It is difficult to read a newspaper or watch cable news or a business channel without being deluged with stories about the debt ceiling and sovereign debt problems in Europe. Even the concept of raising the debt ceiling evokes the image of a desperate call by a credit card holder on the ropes asking the bank to increase his credit line so he can survive a little bit longer. And then we hear the chants of America’s coming fall from greatness, usually peppered by references to the Federal Reserve, fiat currency, and Greece.

This fear-soaked environment has led to a market that is climbing a wall of worry that looks very much like that great wall in China. In fact, this is an investment environment that is really without recent parallel.  Perhaps it can be related to the low valuations that prevailed in the aftermath of the last credit crisis that we had in this country, the one that led to The Great Depression. Velocity of money is at historic lows, unemployment is stubbornly high, and equity prices on some of the greatest companies in the world remain far below where they should be given their strong earnings, increased competitiveness and fortress-like balance sheets. It is clear that fear is ascendant and it will be a while until investors begin taking on additional risk.

At Beckerman, we think that the most probable future is one in which American companies continue to innovate, producing the most desired products and increasing their capital efficiency.  We also see a continuing global recovery that will grind through the problems of sovereign debt and commodity shocks. While we feel that many of the businesses that will lead the way over the next decade will be based in the US, we are keenly aware that there are great companies in every market. We have made it our business to find those companies, using proprietary methods that value businesses using an intermediate time horizon and employing methodologies that factor in macro and sector-specific growth trends. Using these methods, we continue to find businesses that trade at a fraction of their value. One example is SunPower (NASDAQ: SPWRA), which was added to our Flexible Value portfolio on April 21, 2011.

SunPower has set itself apart in a fractured solar industry by doing what American companies do best, deploying highly directed research and development in search of ever more efficient Solar PV (photovoltaic) solutions. Sun Power has the most efficient solar panels in the world, converting sunlight to electricity at 22.4% efficiency compared to 9% to 14% for most other panels. Sun Power also distinguishes itself with its vertically integrated, modular product line that allows them to compete with even low cost Chinese manufacturers.

SunPower continues to announce key contracts, such as the 711 Mega Watt deal with California Edison and the continued expansion of its supplier agreement with Japan’s Toshiba. But, what really won us over were its financial results.  SunPower’s average revenue grew over the last three years while the industry generally struggled with declining revenues. Their net margins of 7.1% and ROE of 9.88% (TTM Data as of 7/7/11) are similarly impressive.

Yahoo Finance shows analysts expect earnings to grow about 27% per year for the next five years.

Based on all of this, we feel that this company deserves a premium valuation, yet we were able to accumulate our position in late April at a ttm P/E of approximately 10.

Soon after we added this position, Sun Power received a tender offer for 60% of the company at $23 per share from Total, the European energy giant. Total felt that they needed a high quality, integrated solution in the Solar PV (photovoltaic) segment. This matchup leaves Sun Power in a promising position with access to low cost capital and access to the massive customer base that Total serves. With this deal, we feel that an already promising future has become all the more so. Despite this, SunPower still trades at a modest P/E multiple.

SunPower and similar innovative American companies are a central part of Beckerman’s Flexible Value strategy. We remain focused on great businesses and we will continue to be opportunistic in allocating capital to those businesses when prices are attractive. There will always be some good news and some bad news in the headlines. We refuse to let that distract us from our strategy. Great companies have always been the greatest creators of wealth in modern economies, and we don’t foresee that changing.

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