Should You Follow Einhorn When It Comes To Sunedison Inc (SUNE)?
Considered one of the most promising and exciting investments in solar energy, Sunedison Inc (NYSE:SUNE) is facing numerous challenges. The company has shed more than 90% in market value over the past six months and as it stands, could file for bankruptcy protection soon. Amidst the uncertainty hedge fund manager, David Einhorn, remains an unshaken investor. His stance continues to evoke suggestions that there could still be some shareholder value worth unlocking in the company.
Genesis of Sunedison Woes
Until recently, Sunedison was the nation’s fastest growing renewable energy developer. That is not the case anymore as an aggressive acquisition strategy has all but saddled it with almost $12 billion in debt. The company finds itself in the current mess on its dependence on Yieldcos.
Sunedison Inc (NYSE:SUNE) makes most of its earnings from building plants and selling them off to subsidiaries normally referred to as Yieldcos. The subsidiaries are the ones responsible for taking care of operating assets and producing cash flow. The fact that most of these subsidiaries are publicly traded means there was always going to be a conflict of interest.
Unlike parent companies’ Yieldcos, tend to offer high dividends a key enticing feature for investors. When business was good, the subsidiaries used to raise cash by selling stock to buy some of the plants from Sunedison Inc (NYSE:SUNE). A recent decline in commodity prices has all but put pressure on the subsidiaries, making it hard for them to buy already developed plants.
Investor concerns that Yieldcos will not purchase projects developed or in the pipeline continues to put pressure on the overall industry. Sunedison remains the most affected, as it is no longer able to sell developed projects leaving it with mountains of debt.
Einhorn Stake Increase
Following the collapse of Sunedison share price, Einhorn through hedge fund Greenlight Capital bolstered his stake from 6% to 8%. Given the manner in which the stakes were, increased one may argue there is still some value to be unlocked in the stock.
Early this year Greenlight Capital added Claire Gogel into Sunedison Inc (NYSE:SUNE) board. The appointment could be an indication that the hedge fund is working on a plan to unlock some value on the company’s assets. Regulatory filings have also continued to provide hints on the hedge fund’s next big play.
According to the filings, a possible sale of the company’s assets could be in the offing as one of the ways of unlocking shareholders value. The company has also canceled all equity sales as it looks to prevent further dilution of the already suppressed earnings.
Einhorn has continued presence in the company is an indication there is still some value to be unlocked. If there was none, he could have left and not moved to increase his stakes. The investor is on record saying Sunedison core business is worth $15 a share. Adding TerraForm Power Inc. (NASDAQ:TERP) stakes worth $4.50, IDR’s $9 and other assets worth $3, Sunedison should be worth $32 a share according to Einhorn’s estimates.
Gogel, an established private investor, could be the catalysts the company has been waiting for. Given her experience, she should be able to unlock shareholders value on a sum of the parts basis. However, it will not be an easy task given that Sunedison is trading at $0.54 a share. Getting investor’s faith back in the company will be the biggest test.
Even if Sunedison Inc (NYSE:SUNE) is to file for bankruptcy not much will change especially on existing projects. Turning capital away from upcoming projects seems like a viable solution. Given that Einhorn has an impressive record in dealing with bankruptcy stricken firms, the stock appears to offer an interesting risk-reward profile at current trading levels. However this one is not for the faint of heart and there is a large probability of losing everything. The company is debt laden and much could go wrong. Investors that have followed Einhorn so far have paid the price for not doing their own homework.
It is very possible that equity investors do not get to see the upside here and that it will be another lesson in not blindly following a big wig like Einhorn.
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