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Sunrun (NASDAQ:RUN) made headlines on Seeking Alpha earlier this week as it rose the most of any alternative energy company, at just shy of 30%, the day the climate spending bill was announced by Senate Democrats in the United States. And there’s good reason for it – the company has positioned itself to capitalize off any spending boost in the alternative energy sector to help combat climate change caused, in part, by the use of fossil fuels.
One of the reasons that drives my optimism on the company is the fact that before an extra cent was spent through special climate change battling legislation, the company has been taking advantage of various federal, state and local initiatives to install and provide subsidies for installing solar panels for residential consumers, which is the company’s main focus.
This has led the company to generate meaningful revenue growth even before this extra spending bill was introduced, more than almost any North-American based solar panel company that’s currently listed on the US exchanges. It’s interesting to take a ‘run’ down of the company to see how it’s positioned itself to take in some of the new tens of billions of dollars aimed at combating climate change through alternative energy generation.
The Bill To Save The Planet
Ignoring the politics and showmanship of it all, Senate Democrats unveiled a bold climate change bill aimed at reducing emissions and helping the transition away from fossil fuels by investing heavily and subsidizing alternative energy.
As part of the bill, which is quite extensive, there is $60 billion earmarked for subsidies and grants to companies which are in the business of producing clean energy, which Sunrun is in. Given that a vast majority of that, roughly $50 billion, is earmarked towards subsidies for companies themselves who manufacture and operate in the United States means that Sunrun, which operates in the United States, is likely to see a larger part of those funds relative to other companies in the field given their overseas presence.
Another part of the bill which Sunrun is set to benefit from is the environmental justice segment, which calls for an additional $60 billion to be invested in areas which have been disproportionately affected by pollution. This means that a good chunk of that $60 billion will be sent to companies to develop solar means of producing energy to low-income and highly affected areas.
The bill also funds the administrations use of the Defense Production Act to the tune of $500 million, which the Biden Administrations has been using to increase the domestic supply of critical minerals needed for battery and panel productions. This will aid Sunrun to meet demand and avoid harmful supply chain constraints as these mineral extractions are, as of now, not keeping up with the demand they have from companies like Sunrun and others.
Revenue Boost, Another One That Is
As the company is set to gain a significant boost to its revenues by being a North American solar company operators, they’ve already been taking advantage of provisions and subsidies on the federal, state and local levels, which have aided them to report record revenues in the past year while most major solar companies have reported relatively muted growth.
Yes, the company’s jump in revenues from $922 million to over $1.6 billion was partly attributed to their acquisition of Vivint Solar, but given that Vivint made about $340 million in sales in 2019, a good chunk of that increase was organic. The further merging of the companies also allowed Sunrun to more efficiently deploy their resources and cut administrative costs, which is good for getting projects and contracts given the lower potential price offering.
Sunrun has seen a whopping 48% increase in their latest quarterly revenue report, rising sharply from $335 million to $495 million. Where I believe Sunrun is best positioned is when it comes to future expectations. Currently, market analysts expect the company to report muted growth rates over the next 5 years, but I believe the company will easily and vastly outperform these expectations. Here are those current expectations:
| 2022 | 2023 | 2024 | 2025 | 2026 | |
| Sales | $2.0 billion | $2.2 billion | $2.5 billion | $2.9 billon | $3.2 billion |
| Growth | +24.6% | +8.82% | +15.6% | +14.6% |
+11.6% |
(Source: Seeking Alpha Analyst Projections Aggregates)
Company To Easily Outperform
Sunrun is currently valued, for the most part since the company’s share price surged after this deal was announced earlier this week, based on these extremely conservative expectations. The industry is expected to grow at a CAGR of 25.7% through 2028, and that’s accounting for global demand in the commercial and industrial segments and was conducted prior to the over $120 billion in new spending related to solar technologies in the United States.
Given that the company operates in the United States where all of this new spending is being conducted, I believe that the company will easily outperform these expectations and believe they will likely grow sales by over 20% annually through the aforementioned 2026 period. This is driven by expected further consolidation in the industry and the fact that this new spending is largely linked to US-based manufacturing processes and US-based labor, both of which Sunrun has more of than some other major players.
This means that the company is now valued for growing at roughly 10% to 12% annually through 2026 but should experience roughly double the growth.
Profitability Is Key Too
Profitability, obviously, matter a lot too. I believe that there are a few factors worth considering for Sunrun and why I think they’ll outperform peers:
Operating costs
After purchasing Vivint Solar for $3.2 billion, they took on their operating costs as well but have committed to reducing those expenses significantly in order to streamline efficiency.
Cost of goods decline
The cost of manufacturing solar panels, batteries and battery technology is continuing to rapidly drop, even as various transportation and installation costs remained on the higher side after constraints from the COVID-19 pandemic era. These costs are set to decline as well, and I believe that the company will begin moving towards their previous 30% gross profit margin before they began acquisitions of lesser established companies and before supply chain constraints forced up prices.
These 2 factors in particular is why I believe the company will also outperform their earnings expectations, currently said to reach profitability in 2024, when analysts expect them to report $0.48 per share in earnings, giving them a forward price to earnings ratio of about 67x.
Valuation & Conclusion
As earnings per share are expected to increase by mid-double-digits through the aforementioned period of 2026, I believe that the company’s likely outperformance when it comes to sales is going to trickle into profits as well, justifying a higher price to earnings multiple.
Given the additional roughly $120 billion in spending in the company’s primary operating market and its focus on lowering costs by merging with other companies while the federal government continues to provide for, and subsidizes, the raw materials needed for lowering costs, has me extremely optimistic about the company’s long-term prospects through 2030.
A side note here is that the company does have enough resources to meet the higher demand due to this spending and subsidies increase. It currently holds $630 million in cash and equivalents, its highest ever after debt issuance, which I believe is enough to start scaling up projected once, or even if, this bill is passed.
As I look for companies and industries that will likely outperform the broader market through the next 5-10 years, Sunrun is one at the forefront given its positioning within a fast growing market. I am immensely bullish on Sunrun’s long-term prospects and will be adding to my position throughout the next few months as the new spending gets baked into the price.
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