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Import Tariffs Mar Solar Prospects Amid Investment Drive

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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, 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 2018, the solar industry generated a $17 billion investment in the U.S. economy.

Here are the three major industry themes:

  •  Impressive installation trend in the solar market coupled with unexpected rapid growth in the states of Florida and Texas has lately boosted growth expectations for the U.S. solar industry. Wood Mackenzie Power & Renewables now projects 12.6 gigawatts (GW) of solar capacity additions in 2019, indicating 17% growth year over year. Notably, new solar project announcements have led Wood Mackenzie to increase its forecast for 2020 and 2021 utility-scale installations by 2.5 GW and by 1 GW respectively. Such solid projections should make investors confident about the U.S. solar industry’s growth potential.
  • Trump’s imposition of the import tariff on solar products has dealt a major blow to the U.S. solar industry. Per a recent report by SEIA, tariffs on imported solar cells and modules have caused 10.5 GW of solar installations to be cancelled, enough to power 1.8 million homes and reduce 26 million metric tons of carbon emissions. Sadly, solar tariffs are costing the United States more than $10.5 million per day in unrealized economic activity. This must have marred the growth prospects of U.S. solar stocks.
  • Rapidly increasing corporate investments in solar energy have been boosting the U.S. solar market lately. 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. Per SEIA’s Solar Means Business 2018 report, the 7,000 megawatts of commercial solar installations generate 10.7 million megawatt-hour (MWh) of electricity annually, enough to power 1.4 million homes. The outlook for the U.S. solar industry remains optimistic in view of these encouraging numbers.

Zacks Industry Rank Indicates Gloomy Outlook

The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a Zacks Industry Rank #153, which places it in the bottom 40% 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 the result of negative earnings outlook for the constituent companies in aggregate.

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 Outperforms S&P 500 and Sector

The Solar industry has outperformed the Zacks S&P 500 composite as well as its own sector over the past year. The stocks in this industry have collectively gained 39.8% while the Oils-Energy Sector has lost 9.1%. The Zacks S&P 500 composite has gained 18.5% 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 21.77X compared with the S&P 500’s 11.55X and the sector’s 4.87X.

Over the last five years, the industry has traded as high as 27.03X, as low as 3.63X, and at the median of 7.80X, as the charts show below.

Bottom Line

Undoubtedly, Trump’s imposition of the import tariff on solar products has dealt a major blow to the U.S. solar industry. However, 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 keeping the industry buoyant.  

Leading public opinion research firm Global Strategy Group recently revealed new survey results, which indicated that 89% of U.S. voters support extension of clean energy tax incentives for solar. To this end, it is imperative to mention that per an analysis conducted by Wood Mackenzie Power & Renewables, extending tax incentives for solar and other renewables will create more than 100,000 jobs along with generating $87 billion in investment. Such legislations, supported by the nation’s majority, if imposed, can be projected to boost the U.S. solar industry.

Considering the solar industry’s ability to outperform the broader market over the last year, we are presenting three solar stocks with a Zacks Rank #3 (Hold) that investors may want to hold 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 current-year earnings indicates a whopping year-over-year improvement of 790%. It came up with average positive surprise of 21.28% in the trailing four quarters.

SolarEdge Technologies, Inc. SEDG: For this solar inverter developer, the Zacks Consensus Estimate for current-year earnings indicates year-over-year improvement of 27.78%. It came up with average positive surprise of 1.05% in the trailing four quarters.

SunPower Corp. SPWR: For this solar panels and cells manufacturer, the Zacks Consensus Estimate for current-year loss improved 43.1% over the past 90 days. It came up with average positive surprise of 173.27% in the trailing four quarters.

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