Sunrun (NASDAQ: RUN) made headlines on Seeking Alpha earlier this week as it rose the most of any alternative energy company, at just under 30%, on the day the climate spending bill was dropped. announced by Senate Democrats in the USA. And there’s a good reason for that: the company has positioned itself to take advantage of any increase in spending in the alternative energy sector to help combat climate change caused, in part, by the use of fuels. fossils.
One of the reasons for my optimism about the company is the fact that before an extra penny is spent on special climate change legislation, the company has taken advantage of various federal, state and local initiatives to install and subsidize the installation of solar panels. panels for residential consumers, which is the company’s primary focus.
This led the company to generate significant revenue growth even before the introduction of this additional expense bill, more than nearly any North American-based solar panel company currently listed on US stock exchanges. It is interesting to analyze the company to see how it is positioned to absorb some of the new tens of billions of dollars aimed at combating climate change through alternative energy production.
The Save the Planet Bill
Ignoring the politics and showmanship of it all, Senate Democrats unveiled a bold climate change bill to cut emissions and help shift away from fossil fuels by investing heavily and subsidizing energy. alternatives.
Under the bill, which is quite large, $60 billion is earmarked for grants and subsidies to companies that produce clean energy, which Sunrun is in. Given that a large majority of this, around $50 billion, is for subsidies for the companies themselves that manufacture and operate in the United States means that Sunrun, which operates in the United States, is likely to see a greater part of these funds compared to other companies in the field given their presence abroad.
Another part of the bill that Sunrun stands to benefit from is the environmental justice segment, which calls for an additional $60 billion to be invested in areas that have been disproportionately affected by pollution. This means that a good part of this 60 billion dollars will be sent to companies to develop solar means of energy production in low-income and highly affected areas.
The bill also funds the administrations’ use of the Defense Production Act to the tune of $500 million, which the Biden administrations use to increase the national supply of critical minerals needed to produce batteries and batteries. panels. This will help Sunrun meet demand and avoid harmful supply chain constraints as these mineral extractions are currently not meeting demand from companies like Sunrun and others.
Increased income, another that is
While the company is poised to significantly increase its revenue as a North American solar operator, it has already taken advantage of federal, state and local provisions and subsidies, which have helped it declare record revenues. over the past year, while most major solar companies have seen relatively moderate growth.
Yes, the company’s jump in revenue from $922 million to over $1.6 billion was partly attributed to its acquisition of Vivint Solar, but given that Vivint had about $340 million in sales in 2019, a good portion of this increase was organic. The continued merger of companies has also allowed Sunrun to deploy its resources more efficiently and reduce administrative costs, which is good for securing projects and contracts given the lower potential price offer.
Sunrun saw a whopping 48% increase in its latest quarterly revenue report, from $335 million to $495 million. Where I think Sunrun is best positioned is when it comes to future expectations. Currently, market analysts expect the company to show moderate growth rates over the next 5 years, but I believe the company will easily and significantly exceed those expectations. Here are those current expectations:
|Sales||$2.0 billion||$2.2 billion||$2.5 billion||$2.9 billion||$3.2 billion|
(Source: Seeking Alpha Analyst Projections Aggregates)
The company easily outdoes itself
Sunrun is currently priced, for the most part since the company’s share price surged after the deal was announced earlier this week, based on those extremely conservative expectations. The industry is expected to grow at a CAGR of 25.7% through 2028, which factors in global demand across the commercial and industrial segments and was realized ahead of over $120 billion in new technology-related spending solar in the United States.
Given that the company operates in the United States where all of this new spending is being done, I believe the company will easily exceed these expectations and believe that it will likely grow sales by more than 20% per year during the aforementioned 2026 period. . This is due to the continued consolidation expected in the industry and the fact that this new spending is largely tied to US-based manufacturing processes and labor, which Sunrun has more of than some other players. majors.
This means that the company is now valued for growth of around 10% to 12% per year until 2026, but is expected to grow around double that.
Profitability is also essential
Profitability, of course, matters a lot too. I believe there are a few factors for Sunrun to consider and why I think they will outperform their peers:
After buying Vivint Solar for $3.2 billion, they also took over their operating costs, but pledged to drastically reduce those expenses to streamline efficiency.
Lower cost of goods
The manufacturing cost of solar panels, batteries and battery technology continues to decline rapidly, even though various transportation and installation costs have remained high after the constraints of the COVID-19 pandemic era. These costs are also expected to decline, and I believe the business will begin to approach its previous gross profit margin of 30% before it begins acquisitions of less established businesses and before supply chain constraints drive up the costs.
These 2 factors in particular are why I believe the company will also exceed its earnings expectations, which are currently expected to reach profitability in 2024, when analysts expect it to earn $0.48 per share of earnings, giving it a forward price-to-earnings ratio of around 67x.
Evaluation and conclusion
As earnings per share are expected to grow by mid-double digits in the aforementioned 2026 period, I believe the company’s likely outperformance in sales will also trickle down to earnings, justifying a higher price tag. multiple of profits.
Given the additional spending of approximately $120 billion in the company’s core operating market and its focus on reducing costs by merging with other companies while the federal government continues to supply and subsidize raw materials needed to reduce costs, I am extremely optimistic about the company’s long-term prospects through 2030.
A side note here is that the company has enough resources to meet the increased demand due to this increased spending and subsidies. It currently holds $630 million in cash and cash equivalents, its highest level ever after debt issuance, which I believe is enough to start increasing once, or even if this bill is adopted.
While I’m looking for companies and industries that are likely to outperform the broader market over the next 5-10 years, Sunrun is at the forefront given its positioning in a rapidly growing market. I am extremely optimistic about Sunrun’s long-term prospects and will strengthen my position over the next few months as new spending is priced in.