Energy Business

Why Merrill Lynch Still Sees Big Upside in SolarCity and Vivint

The big solar companies have reported earnings and investors are wondering if there will be continued strength as these companies go forward. Solar stocks are in the process of recovering to their previous highs after having been sold off. Merrill Lynch’s team that covers solar companies has a positive view on both Vivint Solar Inc. (NYSE: VSLR) and SolarCity Corp. (NASDAQ: SCTY) for what is to come.

Merrill Lynch’s Krish Sankar and Andrew Hughes reiterated a Buy for Vivint and maintained a Buy rating on SolarCity. 24/7 Wall St. has highlighted why Merrill Lynch sees room for both Vivint and SolarCity to grow simultaneously.

First of all, Vivint reported first-quarter revenue of $9.5 million, above both Wall Street expectations of $8.4 million and Merrill Lynch’s forecast of $8.2 million. The company installed 46 megawatts (MW) of residential solar systems in the quarter, ahead of the brokerage firm’s 40 MW forecast and even management’s target of 41 MW at the midpoint of guidance, which helped drive revenue upside.

Total retained value per watt declined sequentially to $2.05 from $2.11, and incremental retained value per watt increased to $1.75 from $1.65, suggesting an improved pricing mix that likely supported revenue as well.

As a result, Merrill Lynch reiterated a Buy rating for Vivint and cut the price objective to $23 from $24.

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Looking forward, Vivint had soft guidance but still maintained its installation target for the 2015 full year. The firm detailed in its report:

Vivint needs to ramp second half of 2015 installations in order to meet its 2015 target of 300 MW and continue driving the stock’s strong year to date performance (+62.4%). The good news is that a 266 MW tax equity runway and sizeable undrawn aggregation balance means the company has adequate financing capacity to support its full year target.

The increase in headcount this quarter on both the sales and installation businesses is promising, but we note substantial hiring activity needs to continue in order to install 300 MW. Our OpEx forecast moves higher as a result, which pulls down the DCF component of our valuation.

Merrill Lynch described its investment thesis this way:

Our Buy rating on Vivint Solar is based on our assessment of the company’s future cash flow generation, and the net present value of its customer contracts. As solar systems owned by Vivint increases, the future stream of cash flows improves accordingly. Although long in duration, we view those cash flows as low risk electricity payments that represent a reduction in the operating cost of customer premises.

Shares of Vivint Solar closed Thursday down 1.9%, at $14.15 on a 52-week trading range of $7.42 to $18.71. The stock has a consensus analyst price target of $19.83.

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