Sun Edison Will Go Bankrupt

When I was in college, I was approached a recruiter with Sun Edison that was trying to take advantage of the general dedication to green technologies that has always been en vogue on campuses over the past two or three decades. Sun Edison makes solar panels, and is involved it every step of the way–it develops the solar panels, it installs them, it finances them, and then it performs maintenance them. The company seeks as broad of a client base as possible–it’s willing to install solar panels for governments, businesses, and residential homes.

As part of the recruiting pitch, I overheard repeated promises that part of the compensation would be stock based. That is something that only woos me if the business is profitable and growing, otherwise it is a sham to get discounted labor.

Sun Edison is a stock that gets touted frequently because of the famous hedge fund investors that choose to own the stock. Steve Cohen owns 5% of the stock. Daniel Loeb and David Einhorn also have stakes. The company always seems all the move–it sold the semiconductor business, then it bought Vivint Solar for $2 billion, then it created a subsidiary for it to launch an IPO, and then it used this subsidiary to purchase $5 billion in Brazilian orders set to be executed between 2017 and 2022. It’s a party that always has somebody doing something.

But I remain convinced that the stock is more likely than not to go bankrupt within the next three years: There is over $10 billion in debt on the balance sheet, which is extraordinarily high for a company that only does $2.5 billion worth of solar panel activity per year. Note: I didn’t say it makes $2.5 billion per year; those are the cumulative sales.

The last time Sun Edison made money was 2008–it made $700 million that year. Even if those good days were still here, the debt burden would be substantial considering that Sun Edison will be paying over $600 million in interest alone within the next five years. But those profitable are gone.

Sun Edison lost $1.1 billion last year, and is on pace to lose another $1 billion this year. All the deals are a smokescreen that cover up the atrocious fundamentals. It is going to be interesting to see what Sun Edison does next year, as it is projected to lose another billion dollars next year as well. Will shareholders be diluted with the stock in the $2 range? Sun Edison issued 40 million cheap shares in the past year, so this move is not entirely out of the picture.

But what’s going to happen when you try to add more high interest debt to a $10.7 billion debt burden? If it has to borrow an extra billion dollars next year, this may be the situation at the end of 2016: it could owe nearly a billion dollars in cumulative five-year interest payments compared to $2.5 billion in sales. That’s right–40% of sales would be going towards interest payment alone.

Again, there are no profits here. Every time the earth completes a spin on its axis, shareholders find themselves $2.7 million poorer. There are so many signals coming from this company–overpriced deals, high merger-related costs, habitual losses, heavy debt, crippling interest payments, and even heavy share dilution at a time when the stock is incredibly cheap.

People often pressure the oil giants, saying things like “Exxon, why don’t you get heavily involved in solar panel buildouts?” The answer is that it is not nearly as economical as fossil fuel. It is a money losing venture. And, of course, when commodities are cheap, the demand for solar panels decreases.

The only way it would make sense to buy something like Sun Edison would be if you were running a portfolio featuring a hundred stocks under the theory: “These companies look terrible, but if they survive, the capital gains will be enormous.” That statement is probably true. If you owned a hundred companies with terrible financials, and pledged to hold them all for five years, the magnitude of the gains from the survivors would probably exceed the amount of losses from the ones that go bankrupt. But on an individualized basis, it is a poor proposition.

But if you are someone carefully selecting stocks for the next 5+ years, that “if they survive” is a heck of a big assumption. Companies losing a billion dollars per year while struggling under the weight of their debt are not good candidates for long-term holdings. Anyone who has even a shred of balance sheet literacy would treat this is a textbook case of a company about to deliver a gut punch to existing shareholders, and I recommend going through life as if this company doesn’t exist.