California is one of the biggest economic drivers on the planet, with multiple cities dominating just about any list of the hottest construction markets around. Home building is booming from San Francisco all the way down the Central Valley . . . Sacramento, Stockton, Santa Cruz, the boom towns go on and on.
And no matter how many new houses go up in the state’s vacant lots, it’s never enough. California needs to build 3.5 MILLION new units before 2025 just to keep up with demand.
Even now, about 1 out of every 4 new construction starts in the United States happens in “the West,” which overwhelmingly means California. Seattle, Portland and Las Vegas are big markets but even they’re just a drop in the Eureka State ocean.
Ordinarily we’d say that’s a great deal for local contractors and maybe the cement haulers, all those “infrastructure stocks” you hear about all the time but investing in them directly is tricky. Remember, all housing markets are local and a lot of the stocks force shareholders to subsidize weaker regions alongside the hot spots.
But there’s a brand new PURE PLAY on California construction that made my head spin when I heard about it. You see, the state just passed a law forcing every single new home to have a solar roof. It’s a huge deal. Here’s Bloomberg. Here’s the New York Times.
And there’s a unique little company that does nothing but install solar roofs in California: Solar Integrated Roofing Corp. (SIRC). Still in the early stages, it only broke out on the market radar screen recently and it’s still trading well below $1 per share — literal “ground floor” stuff!
The business angle isn’t speculative or hard to understand. There’s no patience, faith or high-tech jargon involved. As President David Savarese loves telling people, this isn’t an experimental solar technology play. He isn’t working on any kind of new photovoltaic films or high-yield cells or anything like that.
It’s just the roofs. In a state that practically worships renewable power even when federal subsidies taper off.
This isn’t hype. Within California alone, there’s 700 megawatts of residential solar already in place, enough to light 500,000 homes and eliminate the need to burn about 750,000 tons of the cleanest coal every year.
And smart or dumb, hot or cold, every house needs a roof. The solar decision doesn’t replace the surface underneath. People who go solar are just upgrading the surface in order to use that space to generate household power. It’s not about solar panels “or” asphalt shingles. It’s about people who need the shingles realizing they can get the solar as well.
SIRC is a roofing contractor first. They replace the shingles when they wear out every 20-30 years. When the homeowner wants to upgrade to cutting-edge solar, they do that too. That side of the story is about as down-to-earth as you might expect from a company that currently trades at a $0.30 ground level . . . we’re not exactly looking at Tesla’s $300 pie in the sky here!
Start with how well the core business is doing. Even in the competitive contracting industry, even in a seasonally weak quarter, SIRC keeps ramping revenue to fresh records, month after month. That’s a classic sign of a company that’s breaking out of existing patterns to the next level . . . we used to call that kind of company “a wild success.”
This little $30 million stock is looking to do at least $40 million in business over the next 18 months. The final number might come in above $60 million. And this is BEFORE the mandate to make every new roof solar goes into effect.
Part of the secret here is the way Savarese inserted his team into the critical moments in the roofing replacement cycle. He doesn’t blast the solar message to everyone 24/7. Instead, the SIRC sales team asks about solar upgrades when people are already looking to do work on the roof.
These are already motivated potential customers. They’re ALREADY looking to spend money on the roof one way or the other, whether SIRC or someone else does the work. All SIRC needs to earn the business is present a better deal, which is where the solar piece comes in!
When you’re already braced to have roof work done, you’re literally looking for a ray of sunshine. SIRC will upgrade you to solar at a price that basically gives you the roof (which you needed to replace anyway) for FREE once you feel the impact on your utility bills. Can the contractor down the block compete with that?
And replacing the roof can cost $5 per square foot so on a typical 1,500 square foot house that’s a fairly big bill. You can’t get a mortgage for that. It strains a lot of credit card limits. Financing is such a headache that there’s 10 MILLION search engine results trying to help.
But once that roof is solar, it qualifies for home improvement loans and other subsidies. SIRC has the numbers. As long as you promise to give them a good review, they’ll make it happen.
That’s another thing: unlike a lot of local roofing companies, SIRC operates in the modern world. They’re promoting their business in the online contractor review sites like Angie’s List and HomeAdvisor (IAC) . . . . they already rule the solar category in key markets like San Diego.
That’s a key piece of the strategic plan here. SIRC has partnered with Lowe’s (LOW) as preferred installation contractor. Whenever people buy panels in the store, this is the company that gets the call to do the work.
Lowe’s has a staggering footprint in the home improvement industry. While the amount of business hasn’t been huge so far . . . basically one referral every couple of weeks . . . you can see the potential for scaling up as SIRC ramps capacity and cash flow.
As it is, I’m thinking there must be some extremely ambitious developments brewing on that front as well. The roofing business is extremely fragmented, big and fractious enough to support at least two separate independent trade organizations in sun-loving California alone.
Down here at $0.30, SIRC has plenty of work ahead of it just growing into the local opportunity. There’s 12.8 million households in California. If they need to replace their roofs on a 25-year cycle, that’s 300,000 jobs every year.
Add those new roofs starting when 2020 rolls onto the calendar just 18 months from now. If the state needs to build 700,000 homes a year to keep up with the population, the opportunity for SIRC just TRIPLED. Even if it doesn’t, state construction permits are generating 80,000 a year extra jobs for smart roofers.
Maybe those roofers down the block can keep chasing their slivers of that huge market. They’re getting older, looking to retire in a lot of cases. They might not be familiar with solar or consider it an integral part of their business. They definitely don’t have the cash to help out with financing packages.
As SIRC grows, step by step, there’s a vast amount of cash flow to consolidate just in the near term. They’re acquiring local roofers who see the future coming. Sometimes big operations, adding $20 million a year to the annual run rate.
SIRC is definitely unknown to most investors at this stage. People who see the company often write it off as another egghead play tinkering with advanced solar cells.
This isn’t Elon Musk pie in the sky. It’s practical as your neighborhood contractor, as solid as the roof above your head. The literal “light bulb” here is that unlike the old-fashioned roof, this one powers your house. And as that light flickers on across the hottest housing markets around, I think shareholders are in for quite a ride.
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