SCTY - Solar City - Company Profile

SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; MyPower loan agreements; grid control/energy storage systems; zep solar mounting systems and proprietary software. It also sells electricity generated by solar energy systems to customers.

This has been a bad quarter for the solar stocks. Multiple companies have missed earnings and lowered guidance. Solar City was no exception. The company lost -$2.52 compared to estimates for -$2.32. However, revenue of $122.6 million easily beat estimates for $110 million. They guided for the current quarter for a loss of $2.70-$2.80 and analysts were expecting $2.13. The company cut estimates for full year installations to 1,000 to 1,100 megawatts compared to analyst estimates for 1,250 megawatts. Shares dropped -21% on the news to support at $16.50. Shares are down -65% in 2016.

The company said they were expanding into new states in the second half and that would increase sales. Also, sales are normally up in the summer months because roofs are not covered with snow.

They blamed the weak first quarter on regulatory challenges and increased prices that slowed sales. Nevada regulators said they were increasing fees to connect your solar installation to the grid and they were reducing the price the utility companies were going to pay for your power when it reaches the grid. That slowed installations in Nevada. I would think utility companies would like the extra power because they do not have to pay to generate it.

There was also some uncertainty about the extension of the investment tax credits for solar installations. The government did not extend the credits until last December.

Solar City actually installed much more wattage than expected. The company had forecasted it would install 180 megawatts in the quarter. They actually installed 214 megawatts, up 40% from year ago levels. The problem came from the bookings. They only booked 160 megawatts to add to the order backlogs. That meant their backlogs shrank for the quarter. However, the CEO said bookings were up +25% in March/April.

This play recommendation is a bet on Elon Musk as much as it is a bet that Solar City will continue to improve its sales and reduce expenses. There have been rumors that Musk was thinking about taking Solar City private for multiple reasons. Whether that happens or not is of course unknown. However, I do not expect Musk to let Solar City fail or continue to post negative results. He will direct the company and if the current CEO cannot post solid improvements, I am sure Musk can find somebody that will.

Earnings Aug 8th.

I wanted to play the 2018 LEAPS but they were too expensive. With the stock at $19 after trading at $65 just a few months ago there are high expectations. I am going to settle for a January 2017 call and we can revisit the 2018 LEAP question when we exit this position.

Shares dipped to $16.50 and have already rebounded to $19.60 in only 4 days. I expect the rebound to be steady since most of the three week decline was in sympathy to other solar earnings misses in the sector.

Buy Jan $22 call, currently $3.95, initial stop loss $16.25.

Optional

Sell short Jan $10 put, currently $1.86, no initial stop loss.
Net debit $2.09.



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