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.
Here are the three major industry themes:
- No doubt, the novel coronavirus outbreak is hurting all sectors across the board, and the U.S. solar industry is no exception. Per the latest 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. This clouds the growth prospects of the U.S. solar industry. Wood Mackenzie Power & Renewables forecasts that distributed solar will experience a 31% decline in 2020.
- Although Q1 installation data was impressive in the United States, the near-term forecasts are not so bright. SEIA projects a 25% decline in 2020 U.S. solar residential volumes from 2019, which is also down significantly from its pre-Covid-19 forecast. On the other hand, coronavirus impacts will also weigh on non-residential solar market. Accordingly, the near-term impact of the coronavirus pandemic on non-residential solar is expected to cause significant project delays in 2020, resulting in a 38% decline from 2019 volumes. Delayed projects will spill into 2021, leading to a 49% increase over 2020 but still well below both 2019 and pre-Covid-19 forecast levels.Such an unimpressive projection might spook investors.
- 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. Falling prices, and flexible financing and procurement options have led to rapid growth in off-site corporate solar adoption, which made up for more than a third of all commercial solar activity in 2018.Although the current pandemic-led crisis situation has brought solar installation activities to a temporary halt, soaring demand for carbon-free power is hereto stay. So, once the COVID-19 risk subsides, we expect to see a gradual recovery in the industry trends, which will once again attract substantial corporate investments.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a Zacks Industry Rank #194, which places it in the bottom 23% 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 bleak 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 a huge 70% since Mar 31.
Before we present a few solar 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.
One Year Performance
Industry Outperforms S&P 500 and Sector
The solar industry has outperformed the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively gained 89.2%, while the Oils-Energy Sector has lost 26.4%. The Zacks S&P 500 composite has moved up 18.8% in the same time frame.
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 32.61X compared with the S&P 500’s 12.75X and the sector’s 4.78X.
Over the last five years, the industry has traded as high as 32.84X, as low as 3.62X, and at the median of 8.22X, as the charts show below.
One cannot deny the fact that the coronavirus pandemic has hit the industry hard and will continue to affect solar stocks in the near term.
Nevertheless, factors like plummeting price of solar modules and panels, increase in the number of states that have made it mandatory to adopt 100% clean energy in the next few years, and a significant spike in corporate investments are expected to keep the solar industry buoyant.
Even amid such uncertainties, the U.S. solar industry has managed to outperform its sector and the broader market over the pastyear.
Here, we are presenting three solar stocks with a Zacks Rank #3 (Hold) that investors may want to retain in their portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Enphase Energy, Inc. (ENPH - Free Report) : For this solar microinverter manufacturer, the Zacks Consensus Estimate for earnings for the current year indicates a solid year-over-year improvement of 42.4%. Its 2020 earnings estimate has moved up 14.5% in the past 30 days.
SolarEdge Technologies, Inc. (SEDG - Free Report) : For this solar inverter developer, the Zacks Consensus Estimate for 2020 sales indicates year-over-year improvement of 5%. It came up with average earnings surprise of 5.77% in the trailing four quarters.
First Solar Inc. (FSLR - Free Report) : For this solar panels manufacturer, the Zacks Consensus Estimate for 2020 earnings indicates a year-over-year improvement of 95.7%. It came up with average earnings surprise of 48.8% in the trailing four quarters.