Rating Update: Stock Rating F-Lowest (3/20/20)-Sunrun Inc (RUN).

out_logo_500#72649.jpg

BUSINESS

Sunrun Inc. engages in the design, development, installation, sale, ownership, and maintenance of residential solar energy systems in the United States. It also sells solar leads. The company markets and sells its products through direct channels, partner channels, mass media, digital media, canvassing, referral, retail, and field marketing. Sunrun Inc. was founded in 2007 and is headquartered in San Francisco, California.
out_plist#72649.jpg

INVESTMENT RATING

out_map1#72649.jpg

RUN’s future returns on capital are forecasted to fall short of the cost of capital. Accordingly, the company is expected to be a modest Value Eraser.

Sunrun has a current Value Trend Rating of F (Lowest Rating).
The Value Trend Rating reflects highly consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Sunrun has a poor Power Rating of 22 and a poor Appreciation Score of 18, leading to the Lowest Value Trend Rating.

Sunrun’s stock is selling above targeted value. The current stock price of $8.36 compares to targeted value 12 months forward of $7.
This low appreciation potential results in an appreciation score of 18 (82% of the universe has greater appreciation potential.)
out_pt#72649.jpg

Sunrun has a Power Rating of 22. (This poor Power Rating indicates that Sunrun only has a better chance of achieving attractive investment performance over the near to intermediate term than 22% of companies in the universe.)
Factors contributing to this poor Power Rating include: Sunrun’s earnings estimates have fallen very significantly in recent months; is in a slightly weakened position current; and recent price action has been slightly unfavorable.

INVESTMENT PROFILE

Sunrun’s financial strength is below average. Financial strength rating is 40.
out_pfit1#72649.jpg

Relative to the S&P 500 Composite, Sunrun Inc has both Growth and Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that RUN is higher risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, and high financial leverage. Sunrun’s valuation is high: low dividend yield, high P/E ratio, and low price/book ratio. RUN has unusually low market capitalization.

CURRENT SIGNALS

Sunrun’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

Sunrun’s current technical position is very weak. The stock price is in a 0.9 month down move. The stock has declined 38.2% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Sunrun Inc (NASDAQ: RUN) suffers from meaningful negative changes in fundamentals: the consensus estimate for December, 2020 decreased significantly, and the consensus estimate for December, 2021 decreased significantly.
The stock is currently rated F.
On 3/20/20, Sunrun Inc (NASDAQ: RUN) stock enjoyed a major increase of 27.4%, closing at $0.57. Trading volume in this advance was normal. Relative to the market the stock has been weak over the last nine months and has declined -28.4% during the last week.

CASH FLOW

In 2018, Sunrun generated a very significant increase in cash of +$62.46 million (+26%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$49.02 million. Non-operating sources contributed +$290.33 million (+592% of EBITDA). Cash taxes contributed +$25.18 million (+51% of EBITDA). Re-investment in the business amounted to -$981.85 million (-2003% of EBITDA). On a net basis, debt investors contributed +$569.73 million (+1162% of EBITDA) while equity investors contributed +$110.05 million (+224% of EBITDA).
out_cflow.1#72649.jpg

Sunrun’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Sunrun Inc Peer Group. In most years, Sunrun was in the lower quartile. Currently, Sunrun is upper quartile at +592% of EBITDA (+$290.33 million).

Sunrun’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Sunrun Inc Peer Group. In most years, Sunrun was in the top quartile. Currently, Sunrun is upper quartile at +51% of EBITDA (+$25.18 million).

Sunrun’s Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Sunrun Inc Peer Group. In most years, Sunrun was in the top quartile. Currently, Sunrun is lower quartile at -2003% of EBITDA (-$981.85 million).

Sunrun’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Sunrun Inc Peer Group. In most years, Sunrun was in the lower quartile. Currently, Sunrun is upper quartile at +1162% of EBITDA (+$569.73 million).

Sunrun’s Equity Investors, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Sunrun Inc Peer Group. (Since 2016 Equity Investors, %EBITDA has sharply decelerated.) In most years, Sunrun was in the lower quartile. Currently, Sunrun is at the upper quartile at +224% of EBITDA (+$110.05 million).

Sunrun’s Change in Cash, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Sunrun Inc Peer Group. In most years, Sunrun was in the lower quartile. Currently, Sunrun is upper quartile at +127% of EBITDA (+$62.46 million).
out_cflow.2#72649.jpg

Sunrun’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Sunrun Inc Peer Group. (Since 2014 Cash, %Revenue has decelerated very sharply.) In most years, Sunrun was in the second quartile. Currently, Sunrun is above median at +40%.

PROFITABILITY

Sunrun’s return on equity has eroded very significantly since 2016 accelerating very sharply after the 2017 level.
The productivity of Sunrun’s assets rose over the full period 2009-2019: asset turnover has enjoyed a very strong overall uptrend.
out_dpgrfs3#72649.jpg

Sunrun’s return on equity is substantially above median (0.9%) for the four quarters ended September, 2019.
out_dpgrfs3.2#72649.jpg
Operating performance (pretax return on assets) is substantially below median (-6.4%) reflecting asset turnover that is at the lower quartile (0.16X) and lower quartile pretax margin (-41.1%).
Tax “keep” rate (income tax management) is lower quartile (-2.3%) resulting in after tax return on assets that is substantially above median.
Financial leverage (leverage) is at the upper quartile (5.90X).

GROWTH RATES

There are no significant differences between Sunrun’s longer term growth and growth in recent years.
Sunrun’s historical income statement growth and balance sheet growth have diverged. Revenue growth has exceeded asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 4.5% per year. (More recently it has been 25.9%.)

Total asset growth has been -12.8% per year. (More recently it has been 15.0%.)

Annual E.P.S. growth has been -44.9% per year.

Equity growth has been -8.7% per year. (More recently it has been 11.6%.)
No consensus growth rate forecast is available for Sunrun.
out_growthgrf#72649.jpg

Relative to the Sunrun Inc Peer Group, Sunrun’s historical growth measures are generally lower quartile. Revenue growth (4.5%) has been at the lower quartile. Total asset growth (-12.8%) has been lower quartile. E.P.S. growth (-44.9%) has been lower quartile. Equity growth (-8.7%) has been lower quartile.

Consensus growth forecast is unavailable.
out_growthgrf.2#72649.jpg

PRICE HISTORY

Over the full time period, Sunrun’s stock price performance has been variable and below market. Between September, 2015 and March, 2020, Sunrun’s stock price fell -19%; relative to the market, this was a -33% loss. Significant price moves during the period: 1) February, 2020 – March, 2020: -57%; 2) September, 2017 – November, 2018: +164%; and 3) December, 2015 – February, 2016: -52%.
out_price#72649.jpg

TOTAL INVESTMENT RETURNS

Current annual total return performance of 24.7% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through February, 2020 of 24.7% is upper quartile relative to Sunrun Inc Peer Group.

Current 5-year total return performance is not available.
out_quartret#72649.jpg

VALUATION BENCHMARKS

Relative to S&P 500 Composite, RUN’s overall valuation is normal. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/revenue is above median. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is at the lower quartile. Ratio of enterprise value/earnings before interest and taxes is unavailable.
out_tradv#72649.jpg

Sunrun has a major value gap compared to the median. For RUN to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 3.61X to 1.41X. If RUN’s ratio of enterprise value/revenue were to fall to 1.41X, its stock price would be lower by $-16 to $-7.
For RUN to achieve upper quartile valuation relative to the Sunrun Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 3.61X to 3.63X. If RUN’s ratio of enterprise value/revenue were to rise to 3.63X, its stock price would increase by $0 from the current level of $8.36.

VALUE TARGETS

RUN’s future returns on capital are forecasted to fall short of the cost of capital. Accordingly, the company is expected to be a modest Value Eraser.
Sunrun’s current Price Target of $7 represents a -14% change from the current price of $8.36.
This low appreciation potential results in an appreciation score of 18 (82% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 18, the low Power Rating of 22 contributes to an Value Trend Rating of F.
out_vc#72649.jpg

Sunrun’s current Price Target is $7 (-66% from the 2018 Target of $21 and -14% from the 03/20/20 price of $8.36). This dramatic fall in the Target is the result of a +0% decrease in the equity base and a -66% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a large negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a large positive impact.
out_wc.1#72649.jpg
out_wc.2#72649.jpg

PTR’s return on equity forecast is 7.3% — below our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2013 and 2018. The current forecast is above the 2016 low of 4%.

PTR’s growth forecast is 19.0% — above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2013 and 2018. The current forecast is significantly above the 2013 low of 4%.

PTR’s cost of equity forecast is 8.5% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2013 and 2018. The current forecast is above the 2013 low of 5.7%.
out_vc.2#72649.jpg
At Sunrun’s current price of $8.36, investors are placing a negative value of $-5 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 13.0% per year, and a return on equity of 11.3% versus a cost of equity of 7.9%.
PTR’s 2020 Price Target of $7 is based on these forecasts and reflects an estimated value of existing assets of $14 and a value of future investments of $-7.

About John Lafferty 69910 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

Be the first to comment

Leave a Reply

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.