SolarCity (SCTY) Gains as Analysts Sing Praises of New Loan Program

SolarCity (NASDAQ: SCTY) is gaining sharply Monday (+6%) amid a couple bullish analyst notes.

First, Credit Suisse analyst P. Jobin revisited the controversial topic of loan vs. lease economics after recent market data suggested a continued consumer shift from PPAs/leases towards loans.

"We conclude that there are genuine advantages to both homeowners and the residential solar development companies from this transition, although ultimate value creation could be half the potential value realized under the leasing model; further, diminishing entry barriers from widespread access to financing products could erode the thesis of continued industry share consolidation," Jobin said. "The risks that are ultimately shifted off of leasing companies, and the higher upfront cash generation of the third-party loan model, however, likely offsets the lower potential margin profile, in our view."

Jobin added that loan products offer a more compelling and simpler value proposition to homeowners: "SolarCity announced during Q1 earnings (and again by press release last week) a loan product with rates as low as 2.99% for 10-year and 4.99% for 20- year loans through a third-party financing provider (i.e., a company such as Mosaic). We calculate that for a typical customer in California, first year utility bill savings can be ~$261 for a solar PPA and slightly better with $272/yr savings with the loan, but with the loan becoming more advantaged over time as payments are fixed (not escalating) for 20 years. With the potential for 30% more realized savings than from a solar lease by year 5, coupled with the simple proposition that the consumer will own the system free & clear after 10 or 20 years and generate "free" power, we expect the transition to loans will continue."

Meanwhile, in a note late Friday from Deutsche Bank, analyst Vishal Shah, said they walked away from management meetings "incrementally more confident that SCTY remains on track to achieve its cost and cash flow break even target set for the year end."

"While it is too early to figure out the sales momentum of the newly introduced loan product (which would be required to achieve the high end of FY16 installation guidance), initial feedback (from few weeks of data) has been very positive. We also believe the company is making good progress in securing financing required to achieve 2016 installation targets. Maintain Buy, $32 price target."

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