Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does SunPower fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell SunPower's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at SunPower's key statistics:


SPWR Total Return Price Chart

SPWR Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

14.8%

Fail

Improving profit margin

(246.7%)

Fail

Free cash flow growth > Net income growth

396.4% vs. (140%)

Pass

Improving EPS

(321.7%)

Fail

Stock growth (+ 15%) < EPS growth

137.2% vs. (321.7%)

Fail

Source: YCharts.
*Period begins at end of Q3 2010.

SPWR Return on Equity (TTM) Chart

SPWR Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(382.8%)

Fail

Declining debt to equity

108.4%

Fail

Source: YCharts.
*Period begins at end of Q3 2010.

How we got here and where we're going
Despite a huge share-price surge, SunPower looks weaker in its second assessment than it did in its first -- the solar panel manufacturer has lost one of the two passing grades it earned last year. Despite a recent rebound in a number of metrics, SunPower's fundamentals continue to languish below levels reached three years ago, when its shares were much cheaper. However, investors appear to be banking on a long-term growth trajectory, and the company may yet meet its promise. Is the company's share-price rebound sustainable, or will SunPower find that it's lights out in 2014? Let's dig deeper to see what the future may hold.

Solar power, which accounted only about 67 gigawatts of the world's energy use in 2011, has seen its use grow by nearly 50% every year over the past five years, double the growth rate of wind power. Fool contributor Jay Yao notes that sector leaders SunPower and SolarCity possess competitive advantages in distributed power systems, which could wind up being the more powerful long-term trend instead of utility-driven growth, which has been a primary driver thus far. In an effort to meet growing customer demand, SunPower has undertaken a 350 megawatt capacity expansion plan, which will increase its overall capacity from 1.1 GW to roughly 1.8 GW by the end of 2016.

Fool contributor Matthew DiLallo notes that U.S. institutions are increasingly turning toward solar power to cut down their utility costs. SunPower recently completed the installation of 20 megawatts at several California community colleges, which is expected to produce cost savings of more than $5 million per year. SunPower is also growing through utility installations, and provided 579 megawatts of panel generation for MidAmerican Energy Company's Solar Star plant project. Utility solar specialist First Solar remains the category leader here, however, and has installed 550 megawatts at theTopaz Solar Farm, 550 megawatts at the Desert Sunlight Solar Farm, and 230 megawatts at the Antelope Valley Solar Ranch.

Solar manufacturers will also benefit from the booming Japanese solar market, which is expected to install 10 gigawatts of capacity this year alone. Foolish solar expert Travis Hoium notes that SunPower has been capitalizing on higher-margin solar panels: SunPower's E20-series panels gained placement at an 86 megawatt solar plant project in South Africa, which is largely managed by Total, SunPower's largest backer.

SolarCity recently unveiled its first solar securities (bonds), which will rely on the energy produced by solar systems to provide new financing options for SunPower and its peers to fund residential and commercial solar projects in the next few years. SunPower and Solar City already enjoy access to cheap capital from big backers such as Goldman Sachs and Total, and this is a critical advantage in the capital-intensive panel manufacturing sector. With these factors in its favor, SunPower should be able to improve its score next year and show the market that its fundamentals tomorrow can readily justify today's optimism.

Putting the pieces together
Today, SunPower has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Looking for the next great growth stock to invest in?
SunPower has been one of the market's best stocks this year. How would you like to be able to find SunPower-like growth every year? Motley Fool co-founder David Gardner, founder of the world's No. 1 growth-stock newsletter, has developed a unique strategy for uncovering truly wealth-changing stock picks. And he wants to share it, along with a few of his favorite growth-stock superstars, with you! It's a special 100% free report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains, and click here for instant access to a whole new game plan of stock picks to help power your portfolio.

The article Is SunPower Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs, SolarCity, and Total and owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Professional Vs Do it Yourself Investing

Should you get advice or DYI?

View Course »

Forex for Beginners

Learn about trading currencies and foreign exchange transactions

View Course »

Add a Comment

*0 / 3000 Character Maximum

1 Comment

Filter by:
Ray Boggs

SunPower will have some stiff competition now that Hyper X solar modules have hit the market. Hyper X offers a better PTC to STC ratio than over 100 of SunPower's solar panel models, a better temperature coefficient and a much lower price per watt.

November 24 2013 at 10:05 PM Report abuse rate up rate down Reply