SunEdison (SUNE) Management's Credibility Impaired, Says Analyst; Axiom Capital Cuts Rating to Sell

(Updated - November 12, 2015 7:24 AM EST)

Axiom Capital downgraded SunEdison (NYSE: SUNE) from Hold to Sell with a price target of $2.00. Shares were pressured after the company reported Q3 results, but analyst Gordon L. Johnson II doesn't think earnings is the reason shares are down 40% in two days. In his view, management's credibility is impaired.

" .. simplifying things, we no longer blv investors blv mgmt’s forward guide.. Why? Well: (a) SUNE told us 10/7 that it was going to sell 50-70MW of projects into the third-party merchant market in 3Q15 at ~18%-19% gross margins (“GMs”), & (b) Terraform Power (TERP, NR), SUNE’s 43%-owned YieldCo (who’s results are consolidated into SUNE’s reported results), told us, just weeks ago, it would provide a “run-down” valuation for the company (i.e., assuming no drop-downs from SUNE, or valuing its existing portfolio), and also assured investors it did not “have” to take drops from SUNE or invest in SUNE’s warehouses (and made it clear more leverage would be shunned)," wrote Johnson. "Yet, in C3Q15, SUNE sold just 41MW of projects at a 9.6% GM – on a GAAP basis – (sig. missing the 18%-19% GM mark), & TERP provided no analysis around a “rundown” company valuation & committed more capital (i.e., ~$388mn) to the Invenergy warehouse (which we, & many investors, thought SUNE was on the hook for), via debt, lowering C16 CAFD, by our est., by ~$20mn (i.e., ~5% cost of debt on $388mn) – we blv this is the reason TERP pulled its C16 dividend-per-share guidance of $1.75 (delaying when SUNE will hit the “coveted” max IDR splits)."

"With $11.7bn in debt + SUNE’s inability to sell projects at its stated 18%-19% GM + SUNE’s 3Q15 DevCo EBITDA of -$247mn + SUNE’s 3Q15 Op. Cash Flow of -$293mn, unless SUNE can find new cheaper sources of funding and/or sell projects at the high-teens margins it claims – the warehouses are NOT cheap, with rates around 6%, & tied to LIBOR – it seems likely fundamentals are set to worsen (i.e., our base case)," added the analyst.

SI NOTE: This report was tagged as 'Hot Downgrade' at StreetInsider Premium given the actionability of the call. StreetInsider Premium members can see more under this category and be alerted to new posts under this category here: http://www.streetinsider.com/Hot+Downgrades

For an analyst ratings summary and ratings history on SunEdison click here. For more ratings news on SunEdison click here.

Shares of SunEdison closed at $4.90 yesterday.

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