The Company

Spruce Power Holding Corp is a leading owner and operator of distributed solar energy assets across the United States. It was founded in 2012 and went public in 2022 after a merger with XL Fleet. The company offers subscription-based services and primarily generates revenue through the sale of electricity generated by its residential solar energy systems to homeowners pursuant to long-term agreements that obligate the company’s subscribers to make recurring monthly payments, and the servicing of those agreements for other institutional owners of residential solar energy systems. The value proposition to customers is that they provide consistent energy savings month after month compared to the inflation of the utility retail rate.

The origin story of the stock is a mess and is why it’s is sitting at such a depressed valuation. XL Fleet is the original company, and went public via SPAC in 2020. They made false claims about a 12-month pipeline of $220m in sales and projected $1.4bn in sales three years out. Muddy Waters Research released a report about it and the stock dropped massively. They were subsequently investigated by the SEC. In 2022 Spruce Power merged with XL Fleet, creating the current company the stock represents. The company resolved a lawsuit by paying a $11m civil penalty to shareholders in 2023.

As a result of this mess, the stock is down 98% from its ATH in December 2020, and 95% from its IPO price. Currently sitting at $4/share and a market cap of $70m.

This is the past life of the stock and is totally unrelated to the current company. This chapter of the stock is over; the investigation and lawsuit is resolved, Spruce Power has no relation to the fraud that was XL Fleet, and the CEO and current management are from Spruce Power, not XL Fleet – there are no reminiscences of XL Fleet left. Spruce made a mistake merging with XL Fleet and consequently paid the fines for something that wasn’t their doing. They graciously worked with the SEC, who said they reduced the penalty in light of the company’s cooperation and efforts to correct the situation.

The merger happened in September 2022, and the stock is down 50% from when Spruce originally came public at a price of $8.50/share.

The Thesis

I select stocks based on net tangible assets, strength of earnings, and prices well-below true value of the underlying company. The search for these characteristics often leads me to former overvalued or bubble stocks that have been pummelled into oblivion. The stock market is like a pendulum that swings too far on each end. SPRU is currently on the bad end of that pendulum swing, which results in value being offered at a price well-below par.

Balance Sheet

Net tangible assets are $205m, meaning you could buy the whole company for $70m, liquidate all assets and pay off all liabilities, then walk away with $135m profit. However, the company is worth more than liquidation value, which means for your $70m investment you’re receiving greater than the $205m from net tangible assets – already a 3x investment in itself. Net cash is sitting at $111m, 60% greater than the $70m market cap.

An alternative way to view the liquidation value is current assets minus total liabilities (excluding non-recourse debt). This gives us a figure of $160m, then once we add in the value of the entities holding the solar contracts we get to a figure of approx. 2.5x the current market value. As Spruce finances its portfolio acquisitions through non-recourse debt, we can rule out the $618m of debt. If the value of the assets acquired goes below the value of the debt, the assets get handed over to the lenders and Spruce have no further obligations. The company essentially has no debt and $192m of cash, which gives a figure of about $10/share.

Income

The company is losing money, largely due to operating expenses. However, I am not concerned about this due to the fact the company is growing rapidly through low-cost acquisitions financed through non-recourse debt that with have MRR for years to come. The company had a goal of 90,000 customers by the end of 2024, which would be 80% growth in two years, but took advantage of a favorable opportunity that took them to 70,000 within Q1 2023. This level of acquisition is not to be expected every quarter, however it illustrates the opportunity in this space and the willingness of Spruce to take advantage when the opportunity presents itself. The company is constantly looking for acquisitions from developers looking to offload their energy portfolios, which can be bought up at favorable prices. Spruce are among the top five owner-operators of US residential solar companies and their goal is to move into the top three. Being a public company give them a stronger platform that allows them acquire these portfolios. Most solar sellers are in the business of sales and installation, however Spruce buy entire portfolios from developers containing recurring cash flows and attractive rates of return.

Risks

There is not a lot of risk here due to the strength of the balance sheet and the relative price the company is selling at. The biggest risk to the company is if it overpays for acquisitions financed through recourse debt, which will therefore damage the balance sheet, reduce net tangible assets and thus make the stock less appealing. Other risks are if the company cannot manage the operating expenses as the revenue grows or if it cannot maintain attractive interest rates on debt as it continue to acquire developer’s portfolios.

Catalysts

• Share repurchase programme worth up to $50m lasting through May 2025
• Announcements of new acquisitions at favorable prices
• Greater understanding of the non-recourse aspect of the balance sheet by the market