Gordon Johnson's SolarCity Warning: Are Analysts Incorrectly Giving Company Credit For Cash It Can't Get?

Gordon Johnson of Axiom Capital questioned whether the entire sell-side is incorrectly giving SolarCity Corp

credit for cash it can't access. SolarCity, whose shares have plunged 10 percent, announced a new "cash equity" transaction with John Hancock Financial to get $227 million in upfront equity. SolarCity is retaining 5 percent of the cash flows generated from the portfolio of 201MW of residential and commercial solar project cash flows to JHF over the next 20 years. Though the company retained ownership, it sold off 95 percent of its cash flows. Johnson contends that the about $346 million in cash tax-equity associated with this deal is not available to fund growth, or retire debt, as "this cash has already largely been spent to offset the CAPEX of the systems themselves." "We believe this represents a general misunderstanding of how solar tax-equity works versus upfront cash equity injections)," Johnson wrote in a note. Under the deal with JHF, the company gets $3.00 per watt in financing, higher than SolarCity's cost of $2.71 per watt. Further, Johnson said the company sold its cash flows for a loss. "[T]aking SCTY's most recently reported cost/W of $2.71 - $1.38/W in tax equity - $0.07/W in rebates/repayments, one can calculate SCTY's funding needs of $1.25/W. Yet, with cash equity proceeds from the sale of 201MW of project cash flows to JHF for just $1.18/W, in the most simplistic of terms, SCTY sold the portfolio to JHF at a loss," the analyst continued. The analyst also noted that SolarCity's $2.71/W in reported fourth quarter 2015 cost is likely "artificially low" due to the delay of SG&A in to the first quarter. The analyst also cut his 2016 revenue/adjusted EPS estimates to $665.4 million/-$9.79, from $850.6 million/-$7.30. The consensus estimates call sales of $593.10 million and loss of $9.15. Johnson said SolarCity will be "compelled" to cut its annual guidance when the company reports earnings on May 9 due to mild bookings trend borne out of its decision to leave NV, and withdraw MyPower. The company had guided a loss of $2.60 - $2.75 a share for 2016. Shares of SolarCity fell 10.79 percent to $23.59. Johnson has a Sell rating and price target of $7 on the stock.