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 stocks that manufacture inverters for solar power systems, which convert solar power from modules into electricity required by electric grids.
For the third year in a row, the U.S. solar industry installed double-digit gigawatts (GW) of solar photovoltaic (PV) capacity in 2018, per a report by Solar Energy Industries Association (SEIA).
Here are the three major industry themes:
- 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 nations like India and Japan to expand their solar industry by signing a number of deals with U.S. solar players. These factors along with grid developments, has made the U.S. solar industry an attractive investment target for big corporate houses, apart from utility providers. In third-quarter 2018, U.S. solar module prices fell, dropping to their lowest recorded levels. Yet, these levels were above the global average. This indicates that global average selling price (ASP) of solar modules might decline further in the upcoming quarters. This should make prospects even better for the solar industry.
- Oversupply of power in the grids has become a major challenge for the solar industry lately. Thanks to this, the market for solar power storage is booming. According to Wood Mackenzie, this market is expected to witness CAGR of 45% through 2023. In order to make 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 adversely impacted the U.S. solar industry. Per a Reuters report, this tariff 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. Utility-scale solar space witnessed an annual contraction of 3% in 2018 per a recent GTM Research report.
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 #24, which places it in the top 9% 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 bright 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 an optimistic earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have gained confidence in this group’s earnings growth potential over the past few months. Evidently, the industry’s loss estimates for the current fiscal year have gone down 19.6% to 45 cents since November 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 13.6% while the Oils-Energy Sector has lost 0.33%. The Zacks S&P 500 composite has however gained 8.6% 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 10.33X compared with the S&P 500’s 10.84X and the sector’s 5.32X.
Over the last five years, the industry has traded as high as 10.33X, as low as 3.57X, and at the median of 7.08X, as the charts show below.
EV-EBITDA Ratio (TTM)
There’s no denying the fact that Trump’s imposition of the import tariff on solar products dealt a major blow to the solar industry last year. However, factors like global oversupply, a significant spike in corporate procurements and the passage of California’s SB 100 law mandating 100% clean energy have helped the market overcome the post-tariff impacts.
Renewables are likely to be our primary source of energy in the future and solar is a vital part of it. To this end, declining costs of solar technologies and increasing adoption of solar storage solutions make the outlook for U.S. solar stocks positive.
The U.S. solar industry slipped last year as utility-scale project developers pushed operation dates from 2018 to 2019. This in turn has benefited the forecast for the current year. With a robust utility-scale pipeline of over 23 gigawatts, per a GTM Research Report, we remain bullish on the U.S. solar industry for the near term.
We are presenting three solar stocks with a Zacks Rank #1 (Strong Buy) or #2 (Buy) that investors may want to add to their portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.
Sunworks, Inc. (SUNW - Free Report) : For this Roseville, CA-based company, the Zacks Consensus Estimate for current year indicates year-over-year improvement of 11.3%. It came up with average positive surprise of 142.9% in the trailing four quarters. It sports a Zacks Rank #1.
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 310%. It came up with average positive surprise of 33.34% in the trailing four quarters. It carries a Zacks Rank #2.
Sunrun Inc. (RUN - Free Report) : For this San Francisco, CA-based company, the Zacks Consensus Estimate for current-year earnings indicates year-over-year improvement of 413%. It boasts a solid long-term earnings growth rate of 20.8%. It carries a Zacks Rank #2.