/Solar%20Panels%20on%20Roof.jpg)
On a typical day, Solar energy systems provider Sunrun’s (RUN) options volume is 15,829. Yesterday, it was nearly 3x that amount. As a result, it had five put options and two calls with unusual options activity on the day, several of which ought to be attractive to anyone looking to generate income.
Solar energy stocks fell Tuesday and Wednesday after Enphase Energy (ENPH) provided weak guidance along with its Q1 2023 results. The tea leaves suggest there’s a bit of solar slowdown happening. The guidance made investors revisit their valuation multiples.
Enphase stock is down 35% year-to-date. Sunrun has fared a little better. Nevertheless, it’s down more than 8% YTD.
Sunrun’s business strategy will continue to generate profitable revenue growth in the long run. So a retracement of its share price is not unhealthy.
In the first section, I’ll explain what I see as Sunrun’s greatest strengths. Then, in the second section, I’ll look at the options I think make sense here.
Solar Remains a Smart Choice
Except for one outlier, analysts generally like Sunrun’s stock. Of the 30 covering it, 22 rate it Overweight or an outright Buy, with a median target price of $33, 54% higher than where it’s currently trading.
The outlier has a Sell rating on RUN stock and a $12.74 price target over the next 12 months, down considerably from its current price. There’s always one analyst that stands out from the crowd. I wouldn’t read much into it.
Earlier in April, Sunrun got a boost from an analyst upgrade. KeyBanc raised its rating on April 18 to Overweight from Sector Weight. It believes that the company will take market share in California.
UtilityDive.com recently discussed how the net metering rules in California should accelerate the sale and lease of battery storage for solar systems over the next few years.
To accommodate the changes in California, Sunrun launched Sunrun Shift on April 12th. The residential solar subscription maximizes the value of solar energy under the state’s new policy.
“By storing self-generated solar energy throughout the day, Shift optimizes potential customer savings of going solar by increasing self-consumption during peak hours when rates are highest and reducing low-value exports back to the grid through the use of a new storage configuration,” the company’s press release stated.
The bad news is that the state’s NEM 3.0 (net energy metering) is expected to lead to a 38% drop in solar systems installations in 2024 as new buyers realize that the payback period jumps from 4-6 six years to as long as 11 years.
Estimates suggest, however, that battery storage could reduce the payback to eight years, a far more attractive proposition for homeowners contemplating the investment.
“It’s going to take time, of course, for the industry to ramp up sales of these projects. Solar-plus-storage projects are more complicated than just solar projects – they’re harder to sell [and] could be more expensive upfront, especially right now in an inflationary environment,” UtilityDive.com reported Wood Mackenzie principal analyst Zoë Gaston’s comments on the changes happening in California’s solar industry.
Gaston points out Sunrun expects its solar energy capacity to grow by 10-15% in 2023. So moving to battery storage on top of rooftop solar systems should be okay.
Sunrun finished 2022 with $2.32 billion in revenue (44% higher year-over-year) and 797,296 customers (21% higher YOY). In addition, its annual recurring revenue went over $1 billion for the first time.
While it still loses a lot of money from its operations -- $662 million -- its key operating and financial metrics remain very healthy.
It’s easy to see why most analysts like RUN stock.
The Options With Income
As I said in the introduction, Sunrun had seven options with unusual options activity on Wednesday, with five puts and two calls.
While investors will do well holding RUN for 5-10 years, the near-term income potential of some of these put options is attractive.
For example, the May 5 $19 put had a premium income of $1.18 yesterday. Based on its closing price of $19.41, it was a 6.1% yield for an eight-day hold. Its Vol/OI ratio was 57.81x, making it the fifth-most popular option.
So, if you annualize that return, you’re looking at a 278% return. Of course, there’s no chance you pull this off 46x over the next year. But it gives you an idea of what kind of income play it could be.
As I write this around 12:30 EST, RUN is up 11% on the day, and the bid is $0.56, less than half what it was yesterday, but still attractive with a 2.6% yield (119% annualized).
Given the share price has to fall at least $2.60 over the next eight days to have the option put to you, the income play looks to be the only play.
In today’s options trading, the May 5 $19 volume is just 738. The $18 put is the one getting all the action. It has a volume of 3,971, 3.30x its open interest. The bid is $0.36, good for an annualized yield of 76%. That’s still very attractive. Worst-case scenario, you have to buy it in eight days for $17.64 a share, 18% lower than what you’d pay if you bought it today on the open market.
If you like income with your investments, it’s time to run to Sunrun.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
