Impressive projections for near-term capacity additions set the stage for growth in US solar stocks. In addition, encouraging corporate investment boosted the outlook for US solar stocks. However, the lack of policies and possible revocation of Section 201 remain concerns for the long-term growth of solar businesses. Nonetheless, given that renewables remain the ultimate choice for power source among power developers, all hope is not lost for US solar stocks. The forerunners of the American solar industry are Enphase Energy (ENPH – free report), First Solar (FSLR – free report) and Sun Power (SPWR – 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 from the Solar Energy Industries Association (SEIA), reflecting a improvement from 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 reported by SEIA, the U.S. solar market installed 23.6 gigawatts of direct current (GWdc) of solar capacity in 2021, reflecting a solid 19% increase from 2020. We expect robust solar growth similar to United States in the future. . To that end, the U.S. Energy Information Administration (EIA) expects solar power capacity additions to reach 20 GW for 2022 from 13 GW in 2021. good outlook for US solar stocks.
Absence of policy and unfavorable decision It Could Hurt: With the cost of solar installation down more than 70% in the last decade and demand back on track, it’s high time for the US government to undertake advanced policies to promote sustainable industry growth. SEIA report predicts industry will fail to meet targets to reduce CO2 emissions and achieve 100% clean energy by 2035 unless growth policies are adopted and implemented work by Congress. Additionally, in January 2022, the US Department of Justice appealed the US Court of International Trade’s Section 201 ruling that struck down the Trump administration’s efforts to raise solar tariffs. If the Court of International Trade rules in favor of the Department of Justice, it will be detrimental to the solar industry. The increase in the solar import tariff will drive up the cost of installations, thus hampering the growth trajectory of solar stocks.
Corporate investment to boost solar stocks: The rapid increase in corporate investment in solar power has boosted the US solar market. From rooftop systems for local hardware stores to solar parking canopies supporting corporate headquarters to large solar installations powering data centers, solar installations are as diverse and varied as the companies that offer them. Notably, data from the Renewable Energy Buyers Alliance (REBA) shows clean energy purchases by businesses in the United States hit a record 10.6 GW last year. In particular, tech giants are leading the way in terms of corporate investment in clean energy, including solar, with Amazon being the frontrunner. Although the crisis caused by the pandemic initially temporarily halted solar installation activities, the growing demand for carbon-free electricity has again fueled growth. Thus, there is already a gradual recovery in industry trends, which will accelerate once the COVID-19 risk subsides, thereby attracting increased business investment.
Zacks’ industry ranking reflects bleak outlook
The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a Zacks Industry Ranking of #228, which places it in the bottom 10% 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 bottom 50% of industries ranked by Zacks is due to a negative earnings outlook for the constituent companies overall.
Looking at revisions to overall earnings estimates, it appears analysts have lost faith in the earnings growth potential of this group lately. Industry earnings estimates for the current fiscal year are down 44.8% since Jan. 31.
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.
The industry is lagging behind the S&P 500 and the sector
The solar industry has underperformed both the Zacks S&P 500 composite and its own sector over the past year. Shares in this industry collectively lost 20%, while the Oil & Energy sector rebounded 34.6% over the same period. In contrast, the Zacks S&P 500 composite fell 7.5%.
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 32.42X compared to the S&P 500’s 12.34X and the sector’s 4.13X.
Over the past five years, the industry has traded as low as 48.56X, as low as 20.05X and at the median of 37.88X, as seen in the charts below.
EV-EBITDA ratio (TTM)
3 solar stocks to watch
Sun Power: Based in San Jose, California, SunPower designs, develops, manufactures, markets and sells high performance solar electric power technology products, systems and services worldwide for residential, commercial power plant customers and on a large scale. SunPower’s adjusted revenue for the first quarter of 2022 was $336.1 million, up 41.3% from $237.9 million in the prior year quarter. Its cash and cash equivalents were $142.3 million as of April 3, 2022, compared to $127.1 million as of January 2, 2022.
Zacks’ consensus estimate for SunPower’s earnings in 2022 points to a 414.3% improvement over the prior year’s figure. Its sales estimate for 2022 implies a 20.8% improvement over the figure published in 2021. The company currently carries a Zacks Rank #2 (Buy).
Pricing and Consensus: SPWR
Enphase Energy: Based in Fermont, Calif., Enphase designs, develops, manufactures and sells home energy solutions, while microinverters remain the company’s legacy product. The company recently announced that its IQ8 microinverter system is the first in the world to be certified by UL, a world leader in safety science, to UL 1741, 3rd Edition, including Supplement SB.
Zacks’ consensus estimate for Enphase earnings in 2022 indicates a 41.9% improvement over the prior year’s figure. ENPH shows a four-quarter earnings surprise of 23.79% on average. The company currently carries a Zacks Rank #3 (Hold).
Awards & Consensus: ENPH
First Solar: Based in Tempe, AZ, First Solar is one of the world’s leading providers of complete solar PV power solutions and specializes in the design, manufacture and sale of solar electric power modules. The company recently signed a supply agreement with Scout Clean Energy for the delivery of 378 megawatts of direct current (MWdc) of its advanced and responsibly produced thin-film photovoltaic (PV) solar modules.
First Solar is currently posting a strong long-term earnings growth rate of 13.2%. FSLR has a four-quarter earnings surprise of 2.49% on average. The company currently carries a No. 3 Zacks rank.
Price and Consensus: FSLR