Sunrun Inc RUN shares are on the move Tuesday after the company responded to bearish claims issued in a short report. However, one famed short-seller says not so fast.
What Happened: Muddy Waters Capital announced it initiated a short position in Sunrun over the weekend as part of a bearish report against the company.
"We see it as an uneconomic business built on three shaky pillars: The equity story of exaggerated 'Subscriber Values' and 'Gross / Net Earning Assets', funding growth through abusing tax incentives, and issuing ABS that could be exposed to a RUN bankruptcy," Muddy Waters wrote in the report.
The firm also highlighted repeated insider selling and continued management changes as suspect.
Sunrun described the report as deceptive in its response on Tuesday.
"Muddy Waters attempts to mislead their readers with grossly false and inaccurate assertions in a brazenly self-serving effort to mitigate recent losses in their short position at the expense of Sunrun's existing investors," the company said.
Sunrun noted that the premise of the short seller's argument is claiming tax credits based on fair market value is inappropriate under IRS Section 25D. However, the company said it claims credits under Section 48. Sunrun also said Muddy Waters overstated the profit margins embedded in the replacement cost valuation and ignored regulatory and tax court precedents that directly contradict their claims about tax law.
"Muddy Waters has its ‘facts' wrong. For over 10 years, our investors, lenders and independent authorities have closely diligenced our tax and valuation procedures, which Muddy Waters incorrectly describes," said Mary Powell, CEO of Sunrun.
Why It Matters: Famed short seller Jim Chanos laughed at Sunrun's response Tuesday in a series of tweets posted on the Twitter Inc TWTR platform.
"So $RUN would have you believe that their Net Present Value model, which assumes 90% consumer renewal after 20-25 years, no credit losses(!) or technological obsolescence, discounted back at only 5% (Sunrun debt yields over 8%)…is realistic?! Lol, ok," Chanos said.
Getting investors to focus on the company's Net Present Value calculation, which Chanos calls "absurd," is better than having investors look at GAAP financial statements, "where the red ink flows," Chanos said.
"The quotes from the former $RUN finance executives in the @muddywatersre report speak volumes," he added.
In the short report from Muddy Waters, the firm includes what it claims are quotes from a former finance employee at Sunrun. Here is a look at the alleged quote:
"Now the in terms of the non-GAAP metrics like Subscriber Value that are used to basically explain to the Street and to investors, what are the underlying economics at a customer level... those numbers are completely, I wouldn’t say they’re made up numbers, but there's no validation... You should be highly skeptical."
RUN Price Action: Sunrun has a 52-week high of $36 and a 52-week low of $16.80.
The stock was up 5.13% at $31.76 at press time, according to data from Benzinga Pro.
Photo: Benzinga file photo by Dustin Blitchok
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