SolarCity Corp. shares jumped Friday after a CreditSuisse analyst upgraded the company's stock.
THE SPARK: Analyst Satya Kumar raised SolarCity to "Outperform" from "Neutral" based on new financing arrangements, lower operating costs and potential favorable changes to the regulatory environment in California.
THE BIG PICTURE: SolarCity, based in San Mateo, Calif., leases and installs solar energy systems for homes and businesses. The company installs panels on customer roofs for no upfront cost. Customers agree to pay a set price for the electricity generated by the panels, usually over 20 years. The customer needs to buy less electricity from a utility, and total electricity costs fall.
SolarCity needs banks or other companies to finance the purchase and installation of the systems, each of which costs $25,000 or so. Goldman Sachs recently agreed to finance $500 million worth of rooftop solar systems to be marketed and installed by SolarCity. The deal is meant to lead to the installation of 110 megawatts of solar panels on the rooftops of homes, businesses and schools. That would generate enough electricity to power 13,000 average U.S. homes.
Analyst Kumar said Solar City also has a new $100 million to $150 million aggregation vehicle that it announced this week, which should lower its costs.
THE ANALYSIS: Kumar also noted a recent conversation he had with the California Public Utilities Commission, saying he believes regulatory conditions will prove favorable for Solar City in the long run.
The analyst said that he believes the utility commission and the state will support distributed solar generation, even if the net metering cap is not raised by 2015. That cap is a special billing arrangement that credits customers with solar systems for the full amount of electricity that their system generates, according to the commission's website.
Excess electricity generated by a customer's solar system automatically goes back through the electric meter to the utility grid to credit the customer's account. California is one of the top states for solar generation, but the state limits how much electricity can be fed back into the grid under that arrangement.
The analyst believes alternatives to net metering may arise that could support SolarCity's growth.
SHARE ACTION: SolarCity shares climbed by $1.98, or 5.8 percent, to $36.01 in midday trading. The company went public in December and its shares peaked in May at a closing price of $51.60. The stock has fallen since then but is still up more than four-fold since the initial public offering price of $8 per share.