SOLARCITY CORP SCTY S
August 13, 2015 - 6:20pm EST by
Drew770a
2015 2016
Price: 50.06 EPS -7.2 -7.5
Shares Out. (in M): 97 P/E 0 0
Market Cap (in $M): 4,900 P/FCF 0 0
Net Debt (in $M): 1,700 EBIT 0 0
TEV ($): 6,300 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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Description

We are recommending a short in SCTY.  For a detailed analysis, please refer to the the excellent writeup from April 2014.  We think SCTY is ultimately very timely right now as catalysts are now close.  The stock is down 15% since the original writeup (which is quite good in the market) - though we think the downside will accelerate down:

1) From April 2014 til today, EPS estimates for 2015 have dropped from -$2 to -$7/share and revenue estimates have dropped by 10%

2) Perhaps more importantly, Republicans are firmly in control of Congress post the 2014 elections and the odds of the solar tax credit being extended have dropped considerably.  Why does this matter?  As the tax credit drops from 30% to 10% of the value, all of the retained value theoretically captured by SCTY disappears.  The economics just don't make sense without massive subsidization.  '

3) The sellside is starting to realize this issue, but there are still 12 buys and 2 Holds amongst sellside firms (excluding EVA Dimensions).... while in April 2014 there were more holds than buys.  The negative catalyst is closer and the next sellside moves are most likely to d/grade

4) No room to reduce costs:  SCTY response is that they will magically reduce the cost of installation by 20%.  However, the 50%+ of costs that are people / installation are sticky upwards (especially in a tight market).  They can't explain how it will drop - and if it could drop, why they didn't drop already?  Quite frankly, it is mindboggling that the sellside is willing to simply take SCTY's unsupported assumptions and plug it into their model.  It may be even more amazing that buysiders take those models without doing work, in order to rationalize owning the stock.  Very soon this assumption will be shattered.

5) SUNE just got in the market in a big way by buying Vivint.  Big mistake we think, but puts more muscle behind competing in an essentially commoditized market

6) As the installed base of solar is getting bigger, there is a larger pushback by utilities (i.e. Arizona) against the feed in tariff that harms all other users. This will only get worse

7) Credit markets have gotten worse, which will increase SCTY's cost of financing

8) SG&A gets worse in a competitive market, and with a decrease in sales likely given the drop in subsidies, will actually increase as a % (not get better)

9) Energy price increases have slowed significantly http://www.eia.gov/forecasts/steo/report/electricity.cfm . SCTY price increases are actually higher than what many utilities are increasing to residential customers by 2-3%.  Makes the economics less attractive every year.  Not to mention that the shady sales tactics to retail reference energy prices over 20-30 years.... Could lead to a rash of lawsuits.  Especially as solar panels degrade by 50bps +/- year

Target Price: $10.  Based on heavily discounted value to SCTY's retained value (due to carrying corporate overating and overly aggressive assumptions regarding retake rate in 20 years and expenses that SCTY will need to pay to maintain due to normal wear)

 

Note: We are short the stock and may cover at anytime without notice

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Tax credit expiring, sellside updating models, increased competition, degrading earnings, etc

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