Energy

XL Fleet (XL) is Now a Grossly Undervalued Profitable Solar Stock

XL Fleet (NASDAQ: XL) soon to be renamed Spruce Power, is an attractive investment trading at a minimum of one-third of its near-term potential.  Just two days ago they announced the completion of a reverse merger.  Spruce Power is the biggest privately held owner of residential solar power installations in the US, at 53,000. It makes money from those panels — enough to be net income positive.  A few days ago, before the reverse merger with XL Fleet, it was a company that was trading at a market value that was half of its cash reserves, with hardly any debt, and heavily reduced operations. The company gave prior guidance that is was looking to put its cash to use and merge with a profitable entity.  This move essentially unlocked the value of the cash on hand.

Going back in time, investors will realize that XL Fleet was a SPAC that simply did not live up to the hype. It went from 10 to 30s, and then fell victim to its own exaggerations.  The stock fell and former management resigned. The stock was essentially a shell company with $320 million dollars trading at half its cash value.

XL Fleet is now planning a strategic review of its legacy business. The options are selling or closing it.  That just leaves the company with approximately $262 million which is the $320 million in cash less the $58 million which was used for the acquisition of Spruce Power. Spruce Power generates a positive net income of $15m and highly positive adjusted EBITDA at $51m.  Investors need to view Spruce Power as essentially a solar panel acquisition company. Their strength is a team dedicated to finding cheap competitors to gobble up, taking their already installed panels. They finance this with loans that are collateralized on the panels.

The most exciting part of the merger is that the money that is sitting on XL’s sidelines can be brought to immediate use. Spruce has a $166m loan at 8.25%. Extinguishing that loan adds nearly $14m in yearly net income, converting XL into a company generating at least $29m yearly with $100m cash on hand.. with manageable 4% collateralized debt.  The market only thinks that’s only worth $150m. If investors consider zero revenue growth and the higher energy prices in the final quarter of the year it is reasonable to think that these market conditions are going to bump up the income to the $40m range.  The market has not yet noticed this merger. Algorithms are trading it back and forth which provides investors with this grossly undervalued opportunity.

Solar stocks like First Solar (NASD: FSLR), Sunrun (NYSE: RUN), Enphase (NASDAQ: ENPH), and even (partly) Tesla (NASDAQ:  TSLA) have enjoyed a tremendous recent run due to recent legislation that provides subsidies to solar companies. California’s power problems make solar panel installations all the more valuable, with systems like the ones Spruce Power (and now XL Fleet) owns.  This leaves the company in a position to help alleviate the daytime strain on grid.

In contrast, XL Fleet has not received any benefits from the recent run. If XL Fleet was just a dividend stock, it could be trading at $400m and give a 10% yearly dividend yield. If the employees that manage the new acquisitions were terminated, the net income would be even higher, but also yield zero growth.  The current market cap is $150m.

The social media channels are awash with bitter people who bought in at $10 – $20 range telling anyone who would listen about how Spruce Power made up their numbers (zero substantiation), or that the company is debt-laden.  The facts are that they have an interest rate of 4% on the bulk of their debt by simply extinguishing the 8.25% loan from their cash on hand.  The investors in these social channels are failing to realize this.  Social media has also made a stink about the bad reviews.  These factions fail to mention that the untilty industry as a whole receives a lot of bad reviews.  Taken in that context Spruce Power is actually doing quite well with respect to the industry average getting fewer bad reviews on a percentage basis.  None of this matters however because these are long term contracts with the consumers and they are stuck with the solar panels.

The stock has already gone from 30 to 1s, and is going to be highly net income positive with this acquisition of Spruce Power. Yet the market has not yet discovered it. The CEO of Spruce Power will be staying and becoming the CEO of the merged company, and, as part of the acquisition, he received shares in lieu of cash. A young executive with skin in the game who grew the company by 100% in less than two years, operating in exactly the right place (Houston, energy capital of America), born to Chinese immigrants who fled Christian persecution. A hungry executive is precisely what investors need to steer the ship.

Spruce produces tremendous revenues per employee and has low costs due to its acquisition model (they don’t do installations). They are more profitable than their competitors on a per-employee basis by a mile and a half, as the recent presentation clearly shows. The company has room for growth and is grotesquely undervalued. Even at a $400m valuation, this is $2.67, while with growth, those numbers could double.  The stock currently trades at $1.06. The valuation gap seems too unbelievable to be true, but with exposure, the market will get it right. For the time being, the market simply does not know the opportunity exists.

WHEN INSIDER FINANCIAL HAS A STOCK ALERT, IT CAN PAY TO LISTEN. AFTER ALL, OUR FREE NEWSLETTER HAS FOUND MANY TRIPLE-DIGIT WINNERS FOR OUR SUBSCRIBERS. WE SPECIALIZE IN FINDING MOMENTUM BEFORE IT HAPPENS!

Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. This article was written by a guest contributor and solely reflects his opinions.

XL Fleet (XL) is Now a Grossly Undervalued Profitable Solar Stock
Click to comment
To Top