Rising projections for near-term solar deployments paved the way for growth in US solar stocks. In addition, the recently passed Inflation Reduction Act has bolstered the outlook for US solar stocks. However, the UFLPA and ongoing supply chain challenges are hurting the short-term outlook for solar stocks to some degree. Nonetheless, given the rapidly growing demand for renewable energy as the preferred energy source for power developers, US solar investors stand to gain. The forerunners of the American solar industry are Enphase Energy (ENPH – free report), Canadian Solar (CSIQ – free report) and Sunworks (SUN – free report).
About the industry
The Zacks Solar industry can be basically separated into two business groups. While one group is involved in the design and production of high-efficiency solar modules, panels and cells, the other group is engaged in the installation of arrays and, in some cases, complete solar power systems. The industry also includes a handful of companies that manufacture inverters for solar power systems, which convert solar energy from modules into electricity required by power grids. Driven by robust installation trends, solar accounted for 46% of all new power generation capacity added in the United States in 2021, according to a report by the Solar Energy Industries Association (SEIA), reflecting an improvement compared to 43% in 2020. This represents solar energy. the largest share ever created of new production capacity. It ranked first among all technologies for the second year in a row.
3 trends shaping the future of the solar industry
Record solar installations boost outlook: With growing demand over the past two quarters, the U.S. solar industry has seen a solid uptick, overcoming the early negative effects of the COVID-19 pandemic. This is evident from the latest installation trend prevailing in the country. For example, as SEIA reports, residential solar had its biggest quarter ever with 1.36 GWdc installed in the second quarter in the United States. Overall, the US solar industry installed 4.6 GWdp of capacity in the second quarter, reflecting a 12% sequential improvement. We expect to see similar robust solar growth in the US going forward. To that end, SEIA has increased its forecast for total US solar deployments in 2022 by 100 MWdc. Such impressive projections point to a bright outlook for US solar stocks.
The Inflation Reduction Act will act as a catalyst for growth: The landmark Inflation Reduction Act (IRA) passed by the US Senate in August should be a strong growth catalyst for US solar stocks. This latest move by the Biden administration is expected to be a major growth driver for the solar industry in particular. Under this law, for the first time, the U.S. solar industry will have access to production tax credits and an investment tax credit for domestic manufacturing throughout the supply chain. solar value. SEIA and Wood Mackenzie project the IRA to help the US solar market grow 40% through 2027. This, in turn, should boost the growth trajectory of US solar stocks.
Supply chain challenges and UFLPA could hurt: Supply chain constraints have hurt the solar industry, a trend that is expected to continue in the near term. To that end, Wood Mackenzie expects supply from the solar industry to remain constrained through 2023. Due to near-term supply chain constraints, SEIA expects around 77% of the IRA effect materializes in the utility segment after 2024. Therefore, the supply chain issue is expected to remain an overhang on utility scale solar installations. Additionally, in June 2021, the Uyghur Forced Labor Prevention Law (UFLPA) came into effect and resulted in the detention of solar modules, exacerbating current supply chain challenges. To that end, SEIA anticipates that UFLPA may limit solar deployment until 2023 due to module availability constraints, thus delaying the short-term effectiveness of the IRA until 2024 and beyond. These factors make the near-term outlook for solar stocks somewhat bleak.
Zacks’ Industry Ranking Reflects Bright Prospects
The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a #93 Zacks Industry ranking, which places it in the top 37% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, indicates a bleak short-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of industries ranked by Zacks is due to a positive earnings outlook for the constituent companies overall.
Before outlining some alternative energy stocks you might consider for your portfolio, let’s take a look at the industry’s recent stock performance and valuation picture.
Industrials lags sector, beats S&P 500
The solar industry has underperformed its sector but outperformed the Zacks S&P 500 composite over the past year. Shares in this industry collectively gained 18.3%, while the Oil & Energy sector rose 36.8% over the same period. In contrast, the Zacks S&P 500 composite fell 12.5%.
Year-over-year price performance
Current industry assessment
Based on 12-month EV/EBITDA, which is commonly used to value solar stocks, the industry is currently trading at 46.53X compared to the S&P 500’s 11.91X and the sector’s 3.40X.
Over the past five years, the industry has traded as low as 47.51X, as low as 19.59X and at the median of 35.11X, as seen in the charts below.
EV-EBITDA ratio (TTM)
3 solar stocks worth buying
Canadian Solar: Based in Ontario, Canada, Canadian Solar is a vertically integrated manufacturer of silicon ingots, wafers, cells, solar modules (panels) and custom-designed solar energy applications. The company recently revealed that it was awarded a solar-plus-battery energy storage project named Zaldivar from Chile’s National Energy Commission in July 2022. With an expected capacity to move over 263,000 tonnes of emissions of CO2 each year, this project will give Chile a head start towards its goal of achieving carbon neutrality by 2050, thereby strengthening CSIQ’s position in the Latin American solar market.
Zacks’ consensus estimate for Canadian Solar’s earnings in 2022 points to a 135.4% improvement over the prior year’s figure. Its sales estimate for 2022 implies a 45.9% improvement over the reported 2021 figure. The company currently carries a Zacks Rank #2 (Buy).
Pricing & Consensus: CSIQ
Enphase Energy: Based in Fermont, California, Enphase designs, develops, manufactures and sells home energy solutions, while microinverters remain the company’s legacy product. In early September, the company announced the extension of its strategic alliance with its international distribution partner, BayWa re, which will allow Enphase to further strengthen its presence in the wider German and Benelux solar market through its impressive product portfolio of the IQ7 microinverter family. and IQ Batteries in a context of growing demand.
Zacks’ consensus estimate for Enphase earnings in 2022 indicates a 69.7% improvement over the prior year’s figure. ENPH shows a four-quarter earnings surprise of 24.47% on average. The company currently carries a Zacks Rank #2.
Awards & Consensus: ENPH
Solar works: Based in Roseville, California, Sunworks remains focused on the design, installation and management of solar energy systems for commercial, agricultural and residential customers. Last month, Sunworks was named one of the top solar contractors in the United States by Solar Power World, a leading industry publication, for calendar year 2022.
Zacks’ consensus estimate for Sunwork’s earnings in 2022 points to a 26.3% improvement over the prior year’s figure. Its sales estimate for 2022 implies a 42.6% improvement over the figure published in 2021. The company currently carries a Zacks Rank #2.
Pricing and Consensus: SUNW