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Near-Term Outlook for Solar Industry Remains Bleak

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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, the entire solar power systems. The industry also includes a handful of stocks 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), in 2017, there were investments worth $17 billion in the American solar industry.

Here are the three major themes in the industry:

  •  Thanks to the plummeting prices of solar modules and panels, the cost of producing solar power has declined rapidly over the last decade. This has prompted other nations like India and Japan to expand their solar industry by signing a number of deals with U.S. solar players. This, along with grid developments, has made the U.S. solar industry an attractive investment target for big corporate houses, apart from utility providers. The expected decline in the global average selling price (ASP) of solar modules in the upcoming quarters should make the prospects even better for the solar industry.
  • Oversupply of power in the grids has become a major challenge in the solar industry lately. Thanks to this, the market for solar power storage is booming rapidly. According to Wood Mackenzie, this market is expected to witness CAGR of 45% through 2023. In order tomake the most of this opportunity, some of the industry participants are now innovating products that will integrate storage technology into their existing solar solutions.
  • Trump’s imposition of a 30% tariff on import of crystalline-silicon solar cells and modules in January 2018 has started to show its impact. Per a Reuters report, this tariff has led U.S. renewable energy companies to cancel or freeze investments of more than $2.5 billion in large installation projects, along with thousands of jobs. GTM Research has lowered its 2019 utility-scale solar installation forecast for the United States by 20%.

Zacks Industry Rank Reflects Gloomy Outlook

The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It carries a Zacks Industry Rank #171, which places it in the bottom 33% 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 the past few months. Evidently, the industry’s earnings estimates for the current fiscal year have gone down from earnings of 49 cents to a loss of 30 cents since August 2018.

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.

Industry Underperforms S&P 500 and Sector 

The Solar Industry has underperformed the Zacks S&P 500 composite as well as its own sector over the past year. The stocks in this industry have collectively lost 13.9% while the Oils-Energy Sector has gained 0.2%. The Zacks S&P 500 composite has gained 8.8% in the same timeframe.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month EV/EBITDA ratio, which is commonly used for valuing solar stocks, the industry is currently trading at 6.63X compared with the S&P 500’s 9.91X and the sector’s 5.72X.

Over the last five years, the industry has traded as high as 9.86X, as low as 3.45X, and at the median of 7.01X, as the charts show below.


Bottom Line

Rising demand for a carbon-constrained environment along with declining costs of solar technologies should keep the outlook for the U.S. solar stocks favorable. However, the imposition of a 30% tariff on import of crystalline-silicon solar cells and modules by the U.S. government in January 2018 has dampened the industry’s near-term growth prospects. Also, flaring trade tensions between the United States and China remain a concern, with both these nations being leaders in solar expansion.

The Chinese government’s subsidy reduction policy for its solar projects in June is anticipated to be detrimental for those U.S.-based solar stocks that have increased commitments to ship modules or are set to construct new projects in China. Per a recent report by SEIA, the United States installed 2.3 gigawatts (GW) of solar PV capacity in second-quarter 2018 to reach 58.3 gigawatts (GW) of total installed capacity, which reflects a 9% year-over-year decrease. This shows how the recent policy makeovers have dealt a blow to the U.S. solar industry’s near-term growth prospects.

We are presenting three solar stocks with a Zacks Rank #3 (Hold) that investors may want to hold on to for the time being. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Vivint Solar, Inc. (VSLR - Free Report) : For this Provo, UT-based company, the Zacks Consensus Estimate for current year indicates year-over-year improvement of 105.7%. It came up with an average positive surprise of 29.51% in the trailing four quarters. It carries a Zacks Rank #3.

First Solar, Inc. (FSLR - Free Report) : This Tempe, AZ-based company has an estimated long-term earnings growth rate of 16.1%. It came up with an average positive surprise of 20% in the last reported quarter. It carries a Zacks Rank #3.

Enphase Energy, Inc. (ENPH - Free Report) : For this Petaluma, CA-based company, the Zacks Consensus Estimate for current year earnings indicates year-over-year improvement of 136%. It came up with average positive surprise of 66.73% in the trailing four quarters. It carries a Zacks Rank #3.

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