Time To Buy Sunrun, It's Worth $23: Morgan Stanley - Sunrun (NASDAQ:RUN)

Sunrun Inc RUN, a provider of solar energy to homeowners, is a scalable, high-margin, high-growth company, according to Stephen Byrd of Morgan Stanley.

In a report published Monday, Byrd initiated coverage of Sunrun with an Overweight rating and $23 price target given its industry-leading margins and a "distinctive" open platform. The analyst added that the company is "well positioned" to benefit from the "rapid growth" of the U.S. solar industry.

Three-Part Attraction

Byrd added that the U.S. residential solar industry is attractive due to: 1) the large addressable market of 170 GW, or $500 billion; 2) a small current penetration (less than 1 percent); 3) favorable economic trends in which solar costs are falling, while utility bills have risen 3.4 percent per year over the past 10 years.

Other Notes

With that said, the analyst is bullish on Sunrun's business model in which it installs and finances solar panels and sells the homeowner power under 20-year agreements at favorable costs. The company's "proprietary technology" maximizes per-customer profit by offering a customized solution that will help the company achieve the highest net present value per watt in the sector.

Finally, Byrd pointed out that Sunrun's cost structure is mostly fixed and scalable; as it grows sales, the company's cost per-customer will fall, driving even greater margins.

Bottom Line

The stock is trading above Byrd's extreme bear case (lower growth profile, zero margins on new contracts beyond 2020) of $23. These underlying assumptions are in fact "inconsistent," and a base case $23 price target represents an approximate 99 percent upside.

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