SCTY

[doublexup]

I greatly appreciate the discussion and insight from this discussion board and I’m interested what people think of SCTY.

I’ve had a small position for several years and over the past three months SCTY has dropped like a rock (current at ~$26).

News -
They’ve been in the news about Jim Chanos shorting the stock based on his perception of the company operating like a subprime mortgage lender. Elon Musk purchased $5 MM worth of shares at ~$40/share. Per Yahoo, 38% of the company is owned by 5% owners and insiders, demonstrating strong internal ownership.

The company recently guided lower than expected as management ramps downward its aggressive deployment strategy. Management indicated this was due to the expiring solar tax credit on 12/31/2016 and they were preparing for reduced production levels. However this could be also due to lack of demand (incremental cost per sale increasing also) or perhaps an inability to continue to reduce incremental costs per deployment.

From a strategic perspective the company is shifting its customer mix from primarily residential customer facing to commercial customer facing.

Given the telegraphed reduction in the front end sales staff and installment costs, the “holding company” revenues may swing this company to profitability.

Where do people think valuation is on SCTY? It feels so beaten down its worth looking at.

Eric

[PuddinHead42]

First, check out the numbers on our spreadsheets, they don’t look good.
https://docs.google.com/spreadsheets/d/1YzNpy4rWZNqf5L2aP8uf…

https://docs.google.com/spreadsheets/d/1H_v6WOjFi81rM3TH9ZHS…

The two spreadsheets are not in sync and at least one is not updated for the latest quarter, but you can see their earnings stink and are getting worse. That is where you can stop your research. As I always say, if you are buying an SA stock to hold for 5-10 years, then you can also wait until they start showing consistently strong and growing earnings. That is what Saul does, he finds strong and growing earnings today, then when a company like SCTY becomes a “real boy”, then he has more money available to invest in it. Otherwise your are investing on hope.

Q-8	Q-7	Q-6	Q-5	Q-4	Q-3	Q-2	Q-1
($0.05)	($0.03)	$0.31 	($0.26)	($0.52)	$0.21 	($0.04)	($0.22)
							
Trailing TTM Earnings:							
Q-8	Q-7	Q-6	Q-5	Q-4	Q-3	Q-2	Q-1
($0.03)	$0.31 	($0.26)	($0.43)	($0.75)	($1.47)	($1.52)	($1.61)

Not sure why the two spreadsheets are SO far off in the latest 4 quarters.

[CMF_BigECat]

Hi Eric,
I have no position in SCTY and have not done a very extensive study, but I will give you my outsiders perspective…take it for what it’s worth…

First my understanding of the company. Sells and installs solar systems to individuals (and companies?) to put on their house or building at no cost. Does it by taking on a large percentage of debt and makes money on the cost savings from the operation of the collectors and the difference between the cost of electricity and the production of electricity by the solar systems. In order to calculate a benefit with the large upfront costs, the contracts for this play out over a long time. I believe the initial contracts are 20 or 30 years and as I understand it, part of the value is the worth of the system at the end of the contract.

In and of itself, this sounds like a good business plan and could work out very well. My concerns are all around the unknowns, and in this case the unknowns seem very large to me because it plays out over a 20-30 year period of time. Time is a factor that is very difficult to predict, much less be confident about. On top of that, the concerns are multiplied by high leverage.

So let me list a few variables that are unknowns in this equation.

Energy prices, oil, gas, coal, wind power, cold fusion(I.e. New technology that we don’t know about yet). Also throw in there the regulation aspects of a utility and how they will charge for power. Any and all of these will in some way change greatly over the next 20 years and I have no way to predict how. If I could predict energy prices, I would do better just buying or shorting commodity futures…

Interest rates, inflation and deflation. I have no way of predicting where any of these are going. If deflation occurs, why do I want to own a bunch of hard assets while holding a bunch of debt. I don’t know…I agree that rates are low and don’t seem like they can stay this low, but if you know this for a fact, there are long term option plays that can make you a lot of money, much easier than buying this stock.

Technology, and this might be the biggest unknown. It seems very possible that in 20 years these solar systems will seem like dinosaurs… Let’s go back 20 years and say we started a business that leased cable TV satellite receivers. We give them away. Sign people up to long term leases and the beauty of the system is that in 20 years we can reup the customers at little cost and make gobs of money… Oh wait, these receivers are 6 foot dishes sitting in people’s front yards. Remember those? How much are those worth today and what would have happened if you owned them all and were trying to get people to pay you to use them… Do you want to be betting that the technology of today is going to any good at all in 20 years??? What did a computer do 20 years ago? What did a cell phone look like 20 years ago.

Inn the end, any company that is taking on huge debt to bet on today’s technology being worth a lot in 20 years seems very risky to me.

Oh, and about the comfort of the stock price being half of its former value? If the company is 80% debt, Then the true value of the company is only down 10%, because the debt is still there and the company went from 20% equity and 80% debt to 10% equity and 90% debt. Not that big of change. Such is the power (and danger) of leverage. Note: I didn’t look up the numbers, I am sure this is not quite right. I am just making a point, not sure how much leverage is really there. I just don’t like heavily leveraged companies. I have been burnt before.

So, after all that… Do I think this is a bad stock or company? Not at all… Do I want to put a significant amount of money in it… No. Seems like there are many ways for this to go badly and we will not know for years whether it will. If things go well, the company and the stock could do very well. That is the plus side of highly leveraged companies. It just seems like too much of a gamble to me. Why buy this when there are so many simpler companies to own…

Like BOFI … Just Kidding!!!

Randy
Long BOFI and a true Elon Musk admirer…

And I know, all banks are leveraged as well…I didn’t say I was always consistent…

Thanks to all the veterans out there, a lot of sacrifice so I could write a post about a solar company and talk about investments in general…

[captainccs]

I looked at Solar City quite a while ago and passed. My simplified view is that Solar City is an electric utility that instead of building one or more large generating plants builds hundreds or thousands of small rooftop ones. The business model is basically the same, you put up lots of capital in the hopes of eventually getting it back. I don’t like electric utilities so I don’t like Solar City.

Trying to analyze panel and installation costs, renewals, comparable electric rates and myriad other details is just too complicated and of doubtful accuracy. I prefer the bird’s eye view. I’m not saying Solar City is a bad investment, only that for the reasons stated, it’s not my cup of tea.

Denny Schlesinger

[PuddinHead42]

I looked at Solar City quite a while ago and passed. My simplified view is that Solar City is an electric utility

In the hot nano days I “invested” in a company called Nanophase Technologies. Nano was the future baby and this company had real products. They made stuff for making paint last longer and be easier to clean, they made additives for sunscreen. They had lots of proprietary technology. I thought they could be big. At some point I realized they just made good additives and whether they were nano or micro, it just didn’t matter. They were tied to paint sales and sun block sales. I bailed after a nice loss. They still suck.

I feel SolarCity is the same way for some people, it’s SOLAR baby!!! Big deal, they loan you money to buy their product and there are other solar panel companies and installers that can compete. Furthermore, the US tax credits end in just over a year.

I really wanted to invest in SCTY, but this time my spidey sense said “remember Nanophase” and my “That 70’s Show” voice added “dumba$$!”