For Immediate Release
Chicago, IL – May 6, 2019 – Zacks Equity Research Sunrun (RUN - Free Report) as the Bull of the Day, FTD Companies asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Lyft Inc. (LYFT - Free Report) and Facebook (FB - Free Report) .
Here is a synopsis of all four stocks:
Bull of the Day:
Residential solar electricity offers customers the opportunity to generate most or all of their power needs using only the sun. When the cost of the equipment is amortized over its usable lifespan, consumers save thousands of dollars versus buying electricity from public utilities and also get the satisfaction of having avoided fossil fuel energy sources.
Yet the industry as a whole has been stuck in the mud lately. The MAC Global Solar Index – which tracks a basket of companies involved in broad range of solar energy technologies - is currently at essentially the same level as it was at the beginning of 2016, a period during which the S&P 500 has added more than 40% in value.
One Solar company that has defied the sideways trend and even outperformed the broad markets over the same period is residential solar provider Sunrun, and how they’ve done it is an interesting story.
There have been two main factors in the recent underperformance of US solar firms – intense price competition for photovoltaic equipment and the reduction of US government subsidies on residential solar installations.
Sunrun has managed to avoid the negative effects of both of these developments because of its unique structure – which is the product of sophisticated financial engineering.
Though adding solar electricity generation to households makes perfect financial sense in the sunnier parts of the country, the equipment is initially quite expensive to purchase and install and it takes many years before the net savings in electricity costs exceeds the purchase price.
At $20,000 or more for a typical residential system, it takes a major leap of faith – and a big pile of cash – for the average homeowner to make the transition, knowing that the rewards will be spaced out over the next decade or more.
Sunrun, founded in 2007 by charismatic CEO Lynn Jurich and Chairman Edward Fenster - who met at Stanford Business School – seeks to make Solar electric technology available to a wide range of consumers with no initial cash outlay. Jurich and Fenster, along with US Navy veteran Nat Kreamer approached the business plan as essentially a math problem and have turned their solution into the largest provider of solar electricity in the country.
Sunrun offers consumers a variety of options including monthly or long-term lease options as well the opportunity to purchase their equipment, either with an upfront payment or financed by a third party.
The majority of customers choose a long-term lease agreement in which they make a monthly payment to Sunrun that’s less than what their traditional electric bill would have been. Lease customers also take advantage of free service and maintenance on the equipment for the life of the contract – generally 20 years. The rate paid to Sunrun increases over the life of the contract to match expected increases in the price of utility-generated electricity.
Because the equipment is not easily transferable to a new location, the lease is tied to the deed on the house. The contract requires the customer to pay off the value of the system in a lump sum or transfer the contract to a new owner if they sell the property.
Sunrun continues to own the equipment and that’s an important part of the business equation. Until recently, the federal government has offered owners of residential solar electric systems a tax credit of up to 30% of the cost of installation. The credit can be rolled to subsequent tax years and transferred to third parties.
Because Sunrun maintains ownership, they also receive the tax credits. Sunrun then partners with huge conglomerates, including JPMorgan and GEin tax equity deals that allow those giants to reduce their tax obligations at favorable rates.
Investor perception has been that those credits are in jeopardy under the current administration – and they will be reduced to 26% and then 22% over the next several years, but Sunrun will still be able to capitalize on the incentives.
Falling retail prices for solar panels and other equipment have been hurting revenues and share prices at many solar manufacturers. Because Sunrun purchases the equipment rather than producing it themselves, they are in a position the benefit from this trend. The revenue they collect from customers is contractually guaranteed to increase even as their unit costs are shrinking.
In 2018, California passed sweeping energy legislation that will require all newly built homes to be powered by solar energy starting in 2020. Homebuilders will have the choice to install solar systems on individual homes, or include shared solar energy “farms” in new planned communities.
Though builders who buy thousands of sets of equipment at a time will recognize some cost savings because of economies of scale, the mandate is still expected to add between $8,000 and $12,000 to the average cost of a newly constructed home.
California is already one of the nation’s most expensive markets for housing and homebuilders are reluctant to roll the additional cost into the price of the home. Third party operators like Sunrun offer those builders a way to comply with the new regulations without raising list prices.
In addition to cost savings, Jurich sees a trend toward customers preferring creating their own energy to purchasing it from a utility.
“There’s also this real American sense of freedom of producing electricity on my rooftop,” Jurich told the New York Times last year, “And it’s another example of California leading the way.”
With almost 40 million residents, California has been facing a critical shortage of housing units, pushing prices out of the reach of many working families. Progressive Governor Gavin Newsom made the creation of more affordable housing a priority of his campaign and through a system of tax incentives and non-compliance penalties for municipalities, he expects to see 3.5 million new homes built in the state by 2025.
Though some experts doubt the feasibility of reaching Newsom’s aggressive goal, it’s clear that California government is dedicated to producing a large supply of new housing – and also to ensuring that all the new units are solar powered.
When a big government offers business incentives, it tends to be a good idea to own the shares of companies who are in line to receive the benefits.
Sunrun is scheduled to report Q1 results after the markets close on Wednesday, May 8th, and the Zacks Consensus Estimates are for earnings of $0.32/share on revenues of $153M. Full year estimates are for a net of $1.37/share on $722M in sales. Notably, although that sales number is basically flat compared to 2018, $1.37/share would represent a fivefold increase in net earnings, highlighting the improving margin situation.
Those estimates have been increasing lately, earning Sunrun a Zacks Rank #1 (Strong Buy) and also implying a 12 month forward P/E ratio for the company of just 11.3X - well below the S&P 500 at 17X and the Solar industry at 25X.
The Bottom Line
It always makes sense to own the companies that are in a position to benefit from regulatory tailwinds. With its unique and innovative financial structure and the giant state of California committed to spending billions of dollars on the creation of new housing that includes solar power, Sunrun is in a position to ride the alternative energy wave to big profits.
Bear of the Day:
With the Mother’s Day holiday approaching, it might be surprising to find a company in the business of flower delivery as the Zacks Bear of the Day, but FTD Companies has actually been on life support for quite a while.
Like so many other traditional businesses that enjoyed near-monopoly status for years on the basis of strong brand recognition and extensive networks, FTD has fallen victim to the great equalizing power of the internet and now finds itself barely treading water in the flower delivery business.
Founded in 1910, “FTD” originally stood for “Florist’s Telegraph Delivery” and the nationwide association of florists used the hottest technology of the day to offer the delivery of festive floral gifts across the country.
The telegraph was eclipsed by the telephone and FTD continued to add to its network, changing the name to “Florist’s Transworld Delivery” after expanding internationally in the 1960’s.
The very nature of the floral arrangement business guaranteed FTD’s success for a long time. People naturally want to send a floral gift to friends and loved ones who live far away, but flowers don’t travel well. A network of local businesses that could communicate orders with each other represented great value to customers as well as bringing new business to individual florists.
It wouldn’t be uncommon for a small florist to personally create the floral arrangement that the customer ordered and then also personally deliver it to the intended recipient.
In 1910, FTD was the basically the equivalent of a modern technology company, using the telegraph to transmit orders long distances and serve customers they’d never see in person. Fast-forward 100 years and the company was apparently taken by surprise as their business was decimated by internet-based competition.
That local florist – long the foundation of FTD’s network – has largely gone the way of the dodo bird and all sorts of other sole-proprietor, brick and mortar small businesses.
Large, modern operations can use the scale of the internet to take orders from all over the country (and the globe) and fill those orders from vast, efficient warehouse locations rather than expensive retail spaces.
Delivery methods have evolved as well, with flowers being transported by everything from established giant global shipping companies to local ride-share drivers. It has literally never been easier for a merchant to get its products to the end customer.
Restructuring and Warning
FTD made expensive acquisitions of private companies ProFlowers and Sheri’s Berries almost 5 years ago, but has yet to see those investments bear any fruit.
In March, the company issued a warning to investors that after restructuring $218M in debt, it would be left with only enough operating capital to continue operations through July.
The company posted net losses of $225M in 2018 - or $1.37/share. Estimates for full-year 2019 had been as high as $0.61/share just 60 days ago, but fell to just $0.13/share after the company’s latest warning, earning FTD a Zacks Rank #5 (Strong Sell).
With a share price barely north of a dollar, FTD is hardly a good candidate for a short position, but owning those shares doesn’t make much sense either.
Flower arrangement and delivery remains a great industry, but today’s leaders are leveraging technology and infrastructure to offer consumers a better product and experience at a lower price than FTD.
Buy Lyft (LYFT - Free Report) Heading into Earnings as Uber IPO Looms?
Shares of Lyft Inc. have tumbled since the ride-sharing firm went public at the end of March. After some initial positivity, Lyft stock has failed to live up to some of the initial hype. With that said, it is still very early and the company is set to report its first-quarter 2019 financial results—its first as a public company—on Tuesday, May 7.
So, let’s see if investors should consider buying LYFT stock heading into earnings with its peer and main rival, Uber, expected to go public soon.
Lyft was the first of a few major “unicorns”—private companies valued at $1 billion or more—to go public this year. The firm saw its stock price jump roughly 9% above its IPO price in its first day of trading. Since then, shares of the ride-sharing company have fallen over 20% to hover at around $62 per share. It is still early, but investors should note that LYFT’s early performance is one of the worst for a U.S.-based company that raised over $1 billion in its IPO since Facebook’s debut in 2012, according to Dealogic—but things have turned out well for FB.
Overall, Lyft is still a young company in a new and potentially booming industry. The company was founded in 2012 and currently faces one major problem: as its revenues climb, its losses grow. However, Wall Street will likely focus on its top-line expansion and the overall growth of its core business for now, and not earnings.
Looking ahead, our current Zacks Consensus estimate calls for Lyft’s Q1 fiscal 2019 revenue to come in at $744.09 million. Meanwhile, the company’s second-quarter sales are set to reach $799.38 million. Peeking further ahead, the ride-sharing firm’s full-year 2019 revenues are projected to skyrocket 212.56% from the roughly $2.2 billion the firm reported in 2018 to reach $3.31 billion.
At the bottom end of the income statement, Lyft’s is projected to post an adjusted quarterly loss of $1.12 per share in the first quarter. The company is also expected to post a full-year 2019 loss of $4.46 a share.
Lyft is currently a Zacks Rank #3 (Hold) that sports “F” grades for Value and Momentum in our Style Scores system. But as we touched on already, Wall Street will likely focus on top-line growth and customer acquisition for now.
Nonetheless, it seems like it might be a good idea to wait to see how Wall Street reacts to the firm’s first big test as a public company. Not to mention, it is likely prudent for investors to see a more complete breakdown of the company’s financial picture and growth expectations.
Lyft is scheduled to release its first-quarter 2019 financial results after the closing bell on Tuesday, May 7. Make sure to come back to Zacks for a full round-up of the company’s actual results.
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