Increased projections for solar deployments in the near term have set the stage for U.S. solar stocks’ growth. Also, the recently passed Inflation Reduction Act has bolstered the prospects of U.S. solar stocks. However, the UFLPA and consistent supply chain challenges hurt the near-term prospects of solar stocks to some extent. Nevertheless, considering the rapidly growing demand for renewable energy as the preferred source of energy among electricity developers, U.S. solar investors are expected to gain. The forerunners in the U.S. solar industry are Enphase Energy ENPH, Canadian Solar CSIQ and Sunworks SUNW.
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 the 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. Buoyed by robust installation trends, solar accounted for 46% of all new electricity-generating capacity added in the United States in 2021, per a report by Solar Energy Industries Association (SEIA), reflecting an improvement from 43% in 2020. This represents solar’s largest-ever share of new generating 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 Prospects: With growing demand over the past couple of quarters, the U.S. solar industry has been witnessing a solid upside, thereby overcoming the initial adverse impacts of the COVID-19 pandemic. This is evident from the latest installation trend prevalent in the nation. For instance, as reported by SEIA, residential solar had its biggest quarter in history with 1.36 GWdc installed in the second quarter in the United States. As a whole, the U.S. solar industry installed 4.6 GWdc of capacity in the second quarter, reflecting a sequential improvement of 12%. We expect to witness similar robust solar growth in the United States going forward. To this end, the SEIA boosted its expectation for total U.S. solar deployments in 2022 by 100 MWdc. Such impressive projections are indicative of a bright outlook for U.S. solar stocks.
Inflation Reduction Act to Play the Role of Growth Catalyst: The historic Inflation Reduction Act (IRA) passed by the U.S. Senate this August is projected to be a solid growth catalyst for U.S. solar stocks. This latest ruling by the Biden administration is expected to be a major growth driver for the solar industry in particular. As part of this Act, for the first time, the U.S. solar industry will have access to production tax credits and an investment tax credit for domestic manufacturing across the solar value chain. SEIA and Wood Mackenzie project IRA to aid the U.S. solar market to grow 40% through 2027. This, in turn, should boost U.S. solar stocks’ growth trajectory.
Supply Chain Challenges & UFLPA Might Hurt: Supply chain constraints have been hurting the solar industry, a trend expected to continue in the near term. To this end, Wood Mackenzie expects the solar industry to remain supply constrained through 2023. Due to near-term supply chain constraints, SEIA expects almost 77% of the effect of the IRA to materialize in the utility-scale segment after 2024. Consequently, the supply chain issue is expected to remain an overhang on utility-scale solar installations. Moreover, in June 2021, the Uyghur Forced Labor Prevention Act (UFLPA) went into effect and resulted in the detention of solar modules, exacerbating ongoing supply chain challenges. To this end, SEIA projects that UFLPA could limit solar deployment through 2023 due to module availability constraints, thus delaying the near-term effectiveness of the IRA to 2024 and beyond. These factors make the near-term outlook for solar stocks somewhat bleak.
Zacks Industry Rank Reflects Bright Outlook
The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a Zacks Industry Rank #93, which places it in the top 37% 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 top 50% of the Zacks-ranked industries is due to a positive earnings outlook for the constituent companies in aggregate.
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 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. The stocks in this industry have collectively gained 18.3%, while the Oils-Energy Sector has rallied 36.8% in the same time frame. On the other hand, the Zacks S&P 500 composite has gone down 12.5%.
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 46.53X compared with the S&P 500’s 11.91X and the sector’s 3.40X.
Over the last five years, the industry has traded as high as 47.51X, as low as 19.59X, and at the median of 35.11X, as the charts show 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 power applications. The company recently revealed that it secured a solar plus battery energy storage project named Zaldivar from Chile's Energy National Commission in July 2022. With an expected capacity to displace more than 263,000 tons of CO2 emissions each year, this project will put Chile a step ahead toward its target of achieving carbon neutrality by 2050, thereby further strengthening CSIQ’s position in Latin America’s solar market.
The Zacks Consensus Estimate for Canadian Solar’s 2022 earnings indicates an improvement of 135.4% from the prior-year reported figure. Its 2022 sales estimate implies an improvement of 45.9% from 2021’s reported figure. The company currently carries a Zacks Rank #2 (Buy).
Price & Consensus: CSIQ
Enphase Energy: Based in Fermont, CA, Enphase designs, develops, manufactures and sells home energy solutions, while microinverters remain this company’s legacy product. In early September, the company announced the extension of its strategic alliance with its international distribution partner, BayWa r.e, which will allow Enphase to further strengthen its presence in the broader solar market of Germany and Benelux through its impressive product portfolio of IQ7 family of microinverters and IQ Batteries amid rising demand.
The Zacks Consensus Estimate for Enphase’s 2022 earnings indicates an improvement of 69.7% from the prior-year reported figure. ENPH boasts a four-quarter earnings surprise of 24.47% on average. The company currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: ENPH
Sunworks: Based in Roseville, CA, Sunworks remains focused on the design, installation and management of solar power 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 the calendar year 2022.
The Zacks Consensus Estimate for Sunwork’s 2022 earnings indicates an improvement of 26.3% from the prior-year reported figure. Its 2022 sales estimate implies an improvement of 42.6% from the 2021 reported figure. The company currently carries a Zacks Rank #2.
Price & Consensus: SUNW
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