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SolarCity Earnings Preview: Can SCTY Continue the Trend?

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It has been a great time to be invested in the solar industry, as the space has finally started to show some promise. Stocks across the sector have been among the best performers as of late, with several surging to new heights.

In particular, SolarCity has been shining bright, and was actually one of the three best performing stocks with a market cap over $500 million during the month of October. The stock appreciated by over 55% in the month alone, pushing its year-to-date gain close to 400%.

Clearly, the stock has become an instant investor-favorite, and with Elon Musk of Tesla (TSLA - Free Report) fame backing the company, few are willing to bet against SCTY right now. But after some great earnings reports out of many of its competitors—such as (CSIQ - Free Report) and (FSLR - Free Report) -- lately, the pressure will definitely be on SolarCity to post some solid results after the bell on Wednesday and show that it has earned at least a bit of its lofty valuation.

Solar City Earnings in Focus

According to our estimates, SCTY is expected to lose 46 cents for the quarter. This is a bit of a reduction from two months ago, as the analyst consensus stood at a 43 cent loss then. However, it is worth noting that estimates have trended a little higher lately, as the most accurate estimate is slightly higher than the consensus, giving SolarCity an Earnings ESP of 2.17%.

This positive ESP, when combined with the company’s current Zacks Rank #3 (Hold), suggests that the firm might be in for a modest beat when it reports earnings. Furthermore, it is worth noting that estimates for the current year and next year have also come down, so a solid guidance reading would go a long way to reversing this sluggish estimate trend.

Other Factors

Beyond the bottom line, investors will likely key in on some of SolarCity’s important operational metrics. Since the company focuses heavily on its leasing system—in which customers can get solar panels for free and pay monthly payments instead—megawatts of solar energy systems deployed during the quarter looks to be very important.

For the previous quarter, this figure came in at 53 MW, which was a huge boost from the year ago period which saw 31 MW deployed. However, it is worth noting that there was a bit of a slide in the gross margin on the leasing system segment, as this fell from 68% a year ago, to 65% to end the last quarter. An end to this slide will be important, though this is obviously still a very high gross margin.

Bottom Line

SCTY still has a pretty short history on the market, so there is little investors can take away about a trend forming around earnings season. Others in the sector have performed quite well though, as guidance and earnings for many have come in ahead of expectations.

Thanks to this, and the incredible surge in SCTY’s price so far this year, investors probably have very high expectations for SolarCity this earnings season.

The company may be able to squeak by with a beat—at least when looking at Earnings ESP—but the real focus will have to be on the firm’s guidance and total megawatts deployed, as growth in this key figure will definitely be necessary for SolarCity to maintain its momentum heading into 2014.

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