Adverse impact of the coronavirus outbreak in the U.S. solar market initially jolted installation activities, which, in turn, caused many workers to lose their jobs. However, demand for a carbon-free environment has led to a gradual recovery over the past few months.
Notably, a record 11 GW of new solar capacity was installed in Q3 in the United States, which has already made 2020 the third highest year for solar installations. Also, solid corporate investments made in solar are expected to boost the prospects of solar stocks. The forerunners in the U.S. solar industry are SunPower Corp. (SPWR), Enphase Energy (ENPH) and First Solar (FSLR).
About the Industry
The Zacks Solar industry can be fundamentally segregated into two sets of companies. While one group is involved in the designing and production of high-efficiency solar modules, panels and cells, the other set is engaged in installation of grids and, in some cases, entire solar power systems.
The industry also includes a handful of companies that manufacture inverters for solar power systems, which convert solar power from modules into electricity required by electric grids.
Per a report by Solar Energy Industries Association (SEIA), solar accounted for 40% of all new electric generating capacity added to the grid in the United States in 2019. This was more than any other energy source and the highest in the industry's history.
3 Trends Shaping the Future of the Solar Industry
Coronavirus Dealt a Major Blow Initially: No doubt, the novel coronavirus outbreak has had an adverse impact on all sectors across the board, and the U.S. solar industry is no exception. At the initial level, the pandemic-induced business restrictions brought a temporary halt in installation activities, thereby hurting employment. Per a report by SEIA, the coronavirus pandemic has caused more than 72,000 solar workers to lose their jobs since February 2020. Notably, the impact of job losses and work stoppages has been acute in the U.S. distributed generation sector, which includes residential and commercial projects, clouding the prospects of the U.S. solar industry, to some extent.
Solid Solar Installations Improve Prospects: While the coronavirus outbreak did impact solar stocks initially, the industry has started to recover in recent times, which is evident from the latest installation trend prevalent in the nation. For instance, in the third quarter of 2020, the U.S. solar market installed 3.8 GWdc of solar PV, up 9% from the prior-quarter figure and 46% year over year. Moreover, a record 11 GW of new solar capacity was installed in Q3 despite COVID-related setbacks. Such robust installations have already positioned 2020 as the third-highest year ever for solar installations. No doubt this has boosted growth prospects of the U.S. solar industry. Wood Mackenzie now forecasts 46% annual growth in 2020, with over 19 GWdc of installations expected. This projection indicates improvement from Wood Mackenzie’s prior estimation of 37% annual growth with 18 GWdc of installations. Such improved forecasts are indicative of the bright outlook for U.S. solar stocks.
Corporate Investments to Boost Solar Stocks: Rapidly increasing corporate investments in solar energy have been boosting the U.S. 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 offering them. Notably, tech giants, major retailers and other corporate leaders installed more than 1,280 megawatts (MW) of new commercial solar capacity in the United States in 2019, the second largest year on record according to the latest Solar Means Business report. Although the pandemic-led crisis situation initially brought solar installation activities to a temporary halt, soaring demand for carbon-free power has once again instilled growth in it. So, we are already witnessing a gradual recovery in the industry trends, which will accelerate once the COVID-19 risk subsides, thereby attracting increased corporate investments.
Zacks Industry Rank Reflects Grim Outlook
The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a Zacks Industry Rank #188, which places it in the bottom 26% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is due to a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group’s earnings growth potential in recent times. Evidently, the industry’s earnings estimates for the current fiscal year have gone down by 6.3% since Oct 31.
Before we present a few alternative energy stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Beats S&P 500 & Sector
The Solar Industry has outperformed both the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively surged 218.9% while the Oils-Energy Sector has slumped 30%. The Zacks S&P 500 composite has gained 16.6% in the same timeframe.
One-Year Price Performance
Industry’s Current Valuation
On the basis of trailing 12-month EV/EBITDA, which is commonly used for valuing solar stocks, the industry is currently trading at 43.19X compared with the S&P 500’s 16.71X and the sector’s 4.83X.
Over the last five years, the industry has traded as high as 43.19X, as low as 2.88X, and at the median of 6.40X, as the charts show below.
EV-EBITDA Ratio (TTM)
3 Solar Stocks Worth Watching
SunPower: Based in San Jose, CA, SunPower sells high-performance solar electric power technology products like semiconductor-based solar cells and solar panels, along with providing associated services worldwide for residential, commercial and utility-scale power plant customers. During the third quarter of 2020, in new homes, the company witnessed record bookings, while its backlog grew to more than 50,000 homes. Going ahead, SunPower continues to expect 30-50% revenue growth in both its residential and new homes businesses for 2021.
The Zacks Consensus Estimate for SunPower’s 2020 loss indicates annual improvement of 31%, while its earnings estimate for 2021 indicates a surge of 312.6%. The company delivered an average earnings surprise of 49.23% in the last four quarters. The company currently holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Enphase Energy: Based in Fermont, CA, delivers energy management technology for the solar industry, with microinverters being its legacy product. As of Sep 30, 2020, the company shipped more than 30 million microinverters worldwide and approximately 1.3 million of its Enphase residential and commercial systems were deployed in more than 130 countries. Looking ahead, the company is making good progress on launching the IQ 8 PV, the world’s first grid independent microinverter. It is also set to launch its IQ 8D, which will provide high quality, rapid shutdown compliance in addition to outstanding CEC efficiency of 97.5%. Enphase expects to complete beta installations on IQ 8 and IQ 8D systems in the first quarter of 2021.
The Zacks Consensus Estimate for Enphase’s 2020 earnings indicates annual improvement of 32.6% while that for 2021 represents a surge of 42%. The company delivered an average earnings surprise of 20.84% in the last four quarters. The company currently carries a Zacks Rank #3 (Hold).
First Solar: Based in Tempe, AZ, First Solar specializes in designing, manufacturing, and selling solar electric power modules using a proprietary thin-film semiconductor technology. Given the growing demand for solar modules, the company continues to expand manufacturing capacity. As of Sep 30, 2020, the company had 5.5 GWDC of total installed Series 6 nameplate production capacity across all its facilities. It expects to increase its nameplate Series 6 manufacturing capacity to 6 gigawatts by 2020-end and 8 gigawatts by 2021-end.
The Zacks Consensus Estimate for First Solar’s 2020 earnings indicates annual improvement of 164.9% and has risen 35.6% over the past 60 days. The company delivered an average earnings surprise of 102.06% in the last four quarters. The company currently holds a Zacks Rank #3.
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