Premium for SunPower Justified

The fortunes of SunPower Corporation (A) ( SPWR) appear greener given the very high growth potential in the alternative energy industry, and specifically solar power energy, with apparently greater certainty of polysilicon supply through SunPower’s new agreement with Jiawei SolarChina.

In addition, a new solar cell manufacturing facility in the Philippines and the company’s expansion into the Italian market adds visibility to the story. However, its price has come down heavily on account of inhibitions regarding future U.S. energy policy.

On the other hand, new cheaper polysilicon supply contracts and thinner wafers are improving the solar cell and panel production overheads. Thus, we maintain our Buy recommendation on SPWR common stock with a six-month target price of $106.75. Price appreciation to our near-term target price represents 34.6% upside potential.

Looking ahead, SunPower management seeks to establish the company as the leader in high-performance solar power products. The industry outlook for electric power, and particularly for alternative sources of electricity such as solar power, is bullish. Based on strong demand trends in the first quarter, SunPower raised its guidance for fiscal 08 and re-confirmed its previous 2009 forecast for total revenue to increase at least 40% from 2008 levels.

SPWR Class A Common Shares trade at 48.1x our 2008 earnings per share estimate and 22.7x our 2009 EPS estimate, representing a valuation at the upper-end of the range of comparable public companies in the alternative energy industry, yet such a premium is justifiable given SunPower’s high growth potential. Likewise, alternative valuation metrics such as price to sales, cash flow and book value also indicate comparable premium valuation metrics.

(Read the full analyst report on SPWR