On Thursday, GLJ Research lowered its rating for Sunrun (NASDAQ:RUN) shares from Hold to Sell, setting a new price target of $7.78. The downgrade follows the U.S. Presidential election results, with Donald Trump's victory seen as a potential risk to the company's financial stability.
The research firm suggests that the impending Trump Administration and the likely appointment of a new IRS Commissioner could jeopardize Sunrun's ability to claim Investment Tax Credits ( ITC (NS:ITC)), a critical element of its business model.
The firm's analysis indicates that Sunrun's current financial practices, which include aggressive assumptions and questionable mathematics, could significantly inflate the value of its systems. These practices are said to overstate the value by 78.8% to as much as 213.0%, particularly when considering additional benefits from the Inflation Reduction Act (IRA).
The report points to Sunrun's response to a critique from MuddyWaters, which seemingly acknowledges that the method of calculating tax credits is an industry standard.
The analyst's concerns stem from a combination of factors that Sunrun uses to calculate the fair-market-value (FMV) of its systems. These include a 6% discount rate, despite the company recently raising debt at a rate higher than this, an assumption of a 0% default rate on all consumer loans, an optimistic 90% renewal rate for their services decades in the future, and no accounted cost for roof removal. These assumptions are seen as excessively optimistic and potentially misleading.
The report further highlights the risk that the Trump Administration poses to Sunrun's operational solvency. It draws parallels with SunPower (OTC:SPWRQ) (NASDAQ:SPWR), which also holds a Sell rating from GLJ Research, as an example of the potential impact of the new administration on companies reliant on ITC tax credits.
In conclusion, GLJ Research's downgrade reflects serious concerns about Sunrun's valuation methods and the potential policy changes under the new administration that could affect the company's ability to maintain its claimed tax credits. The new price target of $7.78 represents a 34.6% decrease from the stock's closing price the day before the downgrade was announced.
In other recent news, Sunrun, a leading residential solar company, has witnessed a series of noteworthy developments. GLJ Research upgraded Sunrun's stock rating from Sell to Hold ahead of its third-quarter earnings report for 2024. Despite this, the firm expressed concerns about Sunrun's long-term business model, highlighting the company's consistent negative free cash flow and reliance on government subsidies.
Moreover, Sunrun reported record-setting Q2 2024 earnings with over 116,000 solar and storage systems installed, generating a total value of $310 million. The company also announced a national partnership with homebuilder Toll Brothers (NYSE:TOL), which Goldman Sachs (NYSE:GS) predicts will modestly enhance Sunrun's installation potential in 2025.
Sunrun ended its sales partnership with Costco (NASDAQ:COST), but Truist Securities maintained a Hold rating on the company, stating that this move is not expected to have a substantial financial impact. The company also disclosed its third lease/power purchase agreement securitization of the year, a $365 million asset-backed securities deal, which did not affect its Hold rating from Truist Securities.
In collaboration with Vistra Corp, Sunrun launched the TXU Energy & Sunrun Battery Rewards program in Texas, aimed at improving grid reliability by creating a virtual power plant with energy from residential solar-plus-battery systems. Lastly, Jefferies initiated coverage of Sunrun with a Buy rating, citing the company's promising cash generation forecast and potential for further monetization opportunities.
InvestingPro Insights
Recent data from InvestingPro aligns with GLJ Research's concerns about Sunrun's financial health. The company's market cap stands at $2.66 billion, but it's operating with a significant debt burden and may have trouble making interest payments. This financial strain is reflected in Sunrun's negative P/E ratio of -3.06 for the last twelve months as of Q2 2024, indicating the company is not currently profitable.
InvestingPro Tips highlight that Sunrun is trading at a low Price / Book multiple of 0.5, which could be seen as undervalued or a reflection of market concerns. The stock has taken a big hit recently, with a 17.65% decline over the last week and a 28.49% drop over the past month. This volatility aligns with the analyst's downgrade and concerns about the company's future under a potential Trump administration.
For investors seeking a more comprehensive analysis, InvestingPro offers 16 additional tips that could provide further insights into Sunrun's financial situation and market position.
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