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Shining a Light on SunPower's Books


The solar company finds accounting errors. How bad will it get?

Late Monday, SunPower Corporation (SPWRA), a solar technology firm, announced errors in accounting entries made in the first three quarters of this year.

According to the company's audit committee, its Philippine manufacturing operations may have overstated certain expenses by $1 million in the first quarter of 2009, and understated expenses by $14 million in the second quarter of 2009 and by $2 million in the third quarter of this year.

Even though the accounting review is still open, SunPower has confirmed that it expects its fourth-quarter results to be consistent with previously announced expectations.

But investors aren't so confident. Wall Street has taken a "shoot first, ask questions later" approach to the news, sending shares down 17.88% in early morning trading.

This morning, Citigroup analyst Timothy Arcuri summarized the impact the accounting issues will have on SunPower's financial statements. He notes that the biggest impact is on second-quarter gross margins, which would have been around 17% factoring in the expenses, significantly less than the reported 25%. "Overall, we estimate that SPWRA would have reported ~500bps lower gross margins (~18% vs. ~23%) and would have actually missed consensus EPS by ~ $0.03-0.04 versus a beat of nearly $0.10 as reported," he wrote.

Arcuri reiterated his "Sell" rating and $18 price target for the stock.

Not surprisingly, Citigroup wasn't the only brokerage firm to trash SunPower's stock today. Piper Jaffray downgraded the stock to "Neutral" from "Overweight" and Raymond James downgraded the stock to "Market Perform" from "Outperform."

Sometimes cooler heads will prevail and this is why private money manager Sean Udall (a frequent Minyanville contributor) sees today's weakness as potential buying opportunity, calling the 18% drop in the stock price "very excessive."

"While I hate an accounting overhang, I would buy on prices below $22 as this issue doesn't change my belief that SPWRA is the best solar play," he said. He plans to add to his position on each 7% to 8% drop below $22.

In the long run, Udall may be right that this presents great long-term buying opportunity. But it also could be the early stages of even messier accounting shenanigans. Prudent investors might consider staying away until the company has finalized its investigation.
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