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Sunrun, Vivint Solar stocks surge on new Calif. solar home mandate

A new requirement for California homebuilders to include solar electric systems on new single-family residences and low-rise apartment buildings beginning in 2020 sparked a share price surge for rooftop solar companies May 10.

The day after California energy regulators approved the residential solar mandate, investors in Sunrun Inc., the nation's largest home solar installer, drove the stock more than 18% higher in afternoon trading to a new 52-week high near $12 a share. The boost came on top of a 4.2% increase to $9.83 per share May 9. Shares of Vivint Solar Inc., another rooftop solar company, were up 11% after climbing 8.1% to $4.00 the day before.

California's new requirement could catalyze a comeback for the state's struggling residential solar market, Sunrun CEO Lynn Jurich said May 9 on the home solar specialist's first-quarter earnings call.

"California builds over 100,000 new homes annually. For context, there were approximately 124,000 new solar customers added in California in 2017," Jurich said "I think the story is the industry is returning to growth."

California's solar market halved to 2,604 MW in 2017, according to GTM Research, amid a falloff in demand for residential solar. While the state's residential solar market still accounted for nearly 40% of 2017's U.S. home solar capacity additions, weakness in California triggered an overall 16% U.S. residential solar slide compared to 2016. Sunrun's own installations continued that downward trend in the first quarter of 2018, when it deployed 68 MW, compared to 73 MW in the first quarter of 2017. California accounts for about 40% of Sunrun's business, Jurich said.

San Francisco-based Sunrun expects its growth to resume for the rest of the year, however, starting with 88 MW in the second quarter, a 16% rise from a year ago, and accelerating in the second half. For the full year, Sunrun expects to deploy 325 MW, 15% more than in 2017.

Vivint said May 8 that it expects to install 45 MW to 48 MW in the second quarter.

Storage, grid services

Sunrun said it also sees California's solar home mandate as an opportunity to expand its efforts to offer grid services through the combination of solar and batteries on the systems it leases to homeowners. California's new regulation includes a compliance option for homes that include batteries. A representative of the state's largest building trade association said homebuilders are exploring solar-plus-storage packages. Roughly 20% of Sunrun's California customers already are adding batteries, Jurich said. "In certain markets in Southern California, this rate is now above 50%," she added.

Sunrun is expanding its $100 million partnership with National Grid PLC to offer grid services from such installations, the CEO said on the call.

National Grid provided approximately $8 million for an undisclosed share of revenues generated from grid services contracts. "So that means [a] vote of confidence of their near-term opportunities [and] a lot of those are in California for aggregating the battery and selling those services to the utilities," Jurich said. California's solar mandate for new homes will create "another great market to help accelerate those services efforts."

The company "should be an important beneficiary of the new [California] mandate," Oppenheimer & Co. Inc. analysts said in a May 10 note to clients. Citing Sunrun's solid sales and earnings potential and its intention to refinance debt at more favorable rates, Oppenheimer lifted its share price target to $12. Through May 9, Sunrun's stock was up 66% in 2018 after starting the year under $6 per share.

Sunrun's adjusted net earnings in the first quarter of 25 cents per share beat S&P Capital IQ's consensus estimate of 20 cents per share. First-quarter revenues of $144.4 million beat the consensus estimate by nearly 7%.