By Philip van Doorn
Investors shouldn't only focus on the home solar build-out, according to Dimitry Dayen of ClearBridge Investments
When thinking about how to make money from solar power, investors may tend to focus the three best-known names among equipment manufacturers. But digging a bit deeper can highlight companies that may be set to grow sales and profits more rapidly. And an improved political climate for imports of solar panels signals years of rapid growth for the industry as utilities build solar-panel fields, according to Dimitry Dayen of ClearBridge Investments.
Take a look at the five-year total-return chart for the iShares Global Clean Energy ETF (ICLN), which is the largest exchange-traded fund focused on solar and other environmentally friendly methods of power generation:
The spike for ICLN was reversed when U.S. companies pulled back on solar-installation plans over uncertainty about equipment-supply disruptions during a government investigation into whether China was evading U.S. tariffs on solar panels by having product relabeled as coming from other Southeast Asian countries. Then, in June 2022, the Biden administration said it would wait at least two years before imposing new tariffs on solar-panel imports. In May, Biden vetoed an effort by members of Congress to reimpose tariffs, sticking with the pause until at least June 2024.
In June, Dayen, a research analyst covering renewable-energy and related industrial products and services, estimated a 70% increase in U.S. utility-scale solar installations in 2023, reflecting the more predictable supply environment.
But investors do not seem to have gotten caught up in the renewed industry enthusiasm, judging from the ICLN chart, above, and from a comparison of its valuation ratios and expected compound annual growth rates (CAGR) for sales and earnings with those of the SPDR S&P 500 ETF Trust (SPY), based on weighted estimates among analysts polled by FactSet:
ETF Ticker Forward price/sales Forward price/ earnings Two-year estimated sales CAGR Two-year estimated EPS CAGR iShares Global Clean Energy ETF ICLN 1.7 21.7 10.6% 31.9% SPDR S&P 500 ETF Trust SPY 2.5 19.4 5.2% 11.9% Source: FactSet
A broadly focused ETF won't be expected to match the 70% 2023 growth rate that Dayen expects for U.S. utility-scale solar projects. But you can see in the table that ICLN trades at a discounted valuation to the S&P 500's expected sales and only a small premium to expected earnings (both over the next 12 months), when considering how much more rapidly ICLN's sales and earnings are expected to grow through 2025.
In an interview, Dayen pointed to two lesser-known companies he believes are poised to benefit from increased solar deployment by utilities: Shoals Technology Group Inc. (SHLS) of Portland, Tenn., and Nextracker Inc. (NXT), which is based on Fremont, Calif.
Here's the same comparison of current share-price valuations and expected growth rates for the two companies, along with those of the three largest holdings of ICLN: First Solar Inc. (FSLR), Enphase Energy Inc. (ENPH) and SolarEdge Technologies Inc. (SEDG):
Company Ticker Forward price/ sales Forward P/E Two-year estimated sales CAGR through 2025 Two-year estimated EPS CAGR through 2025 Shoals Technologies Group Inc. Class A SHLS 7.0 33.5 34.1% 48.7% Nextracker Inc. Class A NXT 2.4 23.6 16.2% 46.3% First Solar Inc. FSLR 5.0 19.0 27.2% 67.2% Enphase Energy Inc. ENPH 7.2 27.1 23.5% 30.4% SolarEdge Technologies Inc. SEDG 3.3 23.2 19.8% 19.6% Source: FactSet
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The sales and earnings-per-share CAGR estimates for the five companies are based on consensus calendar-year estimates from 2023 through 2025.
Shoals Technologies makes wiring, known as EBOS (electrical balance of systems), that connects large-scale solar panels to the electric grid. While he didn't have specific figures available, Dayen said he believes the company's U.S. market share for EBOS is more than 40%.
Nextracker makes tracking equipment designed to move solar panels for the best exposure to the sun throughout the day. Dayen estimates its market share is 25% to 40%.
"The two companies make parts of what is, essentially, a solar field. They make it work," Dayen said, adding that "the sales of these companies should sell as a function of the overall industry."
Analysts expect Shoals to show the most rapid growth for sales and earnings through 2025. The shares trade at relatively high ratios to expected sales and earnings over the net 12 months. But for both companies, "as earnings expand there will be upside for the shares, even if [valuation] multiples contract," Dayen said.
The analyst is working to develop a new "global decarbonization leaders" investment strategy for ClearBridge's clients. "It is a new product we are going to pioneer soon," Dayen said. For now, Shoals is held within the ClearBridge Sustainability Leaders Fund , which is rated four stars (out of five) within Morningstar's Large Growth fund category. Nextracker is a holding of the ClearBridge Select Fund , which has a five-star rating within Morningstar's Mid Growth category.
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-Philip van Doorn
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July 18, 2023 06:39 ET (10:39 GMT)
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