We cannot live without the sun; it is our largest source of light and warmth, and in the long run, it is the source of all non-geothermal energy that we use. And as more people grow more environmentally conscious, tapping directly into solar energy is growing ever more popular.
Politics being downstream of culture, we shouldn’t be surprised at the rumors coming out of Washington in recent days, that Congressional leaders are linking solar tax credits into a new COVID relief bill. Under current legislation, solar tax credits for residential projects are due to expire in 2022; while no legislation has come out of Congress yet, any extension of the credits will be good for solar industry manufacturers.
A few points come to mind, for investors to consider. Anticipation of a Biden Administration, with favorable Democratic Party policies toward the alternative energy sector, has boosted solar-linked equities. Second, now that Biden is officially President-elect, we should remember that his campaign promised, and his party wrote into the platform, definite policy preferences on solar power. And finally, if Congress, now freed from worry of a Trump veto, does produce a solar power bill – or link solar policy as a rider on an unrelated bill, such as COVID relief – it will provide proof of long-term relief on the way for the solar sector.
That’s the background to consider as we read the last from Roth Capital analyst Philip Shen, an expert in the alternative energy and clean technology sector. He has been turning his gaze recently to several companies in the solar segment. They have caught his eye for various reasons, and he sees double-digit upside potential for each.
First Solar (FSLR)
We’ll start, appropriately enough, with First Solar. This company is a manufacturer of thin film semiconductor photo-voltaic panels for the utility sector. In lay terms, the company makes the solar collection panels for power plants. First Solar operates around the world – in sunny areas, of course – and is a leader in cutting edge photo-voltaic technology, including the maintenance and recycling of the panels.
In the macro view, FSLR saw only a mild turndown during the corona-induced economic crisis last winter. The stock has recouped the losses it did take then, and more. It is now trading at net gain of 65% year-to-date.
The company’s revenue and earnings have also performed well. Third quarter revenues are up to $927 million, a 44% sequential gain, and EPS, at $1.45, was the highest in over a year. These results were far ahead of expectations.
Shen, in his note on the stock, pointed out two key factors. First, gains due to solar projects: “FSLR delivered better-than expected Q3 revenue… driven largely by higher-than-expected project sales of $501mn including sales of three projects in Japan and two projects in India.” And second, Shen noted the strong margins the company reported: “GMs of 31.6% were above consensus of 23.9% and ROTHe of 24.9%, as a result of high margin project sales especially in Japan that drove a systems margin of 33% and better-than expected module margins of 30% vs. ROTHe of 25.0%.”
These factors prompted Shen to rate FSLR a Buy along with a $110 price target, denoting a 19% upside potential. (To watch Shen’s track record, click here)
Granted, not everyone is as enthusiastic about FSLR as Shen. Out of 13 analysts polled in the last 3 months, 4 are bullish on the stock, while 5 remain sidelined, and 4 are bearish. The 12-month average price target stands at $89.82, roughly in line with where the stock is currently trading. (See FSLR stock analysis on TipRanks)
Sunnova Energy (NOVA)
Now we head into the residential sector, where Sunnova Energy develops and markets systems for homeowners to install on their rooftops, allowing them to tap into solar energy for home use – or even to sell back to the grid. Sunnova operates in 18 states, mainly in sunny areas of the South and Southwest, but also in the Northeast. The company boasts a $4.1 billion market cap and brought in over $130 million in annual revenue in calendar year 2019.
Sunnova is on track to beat that annual revenue this year, even accounting for corona. Total revenues for the first three quarters are over $121 million, with Q3’s top line, at $50.2 million, up by 37% year-over-year.
Roth’s Shen likes what he sees in Sunnova, writing of the company: “Management continues to see strong growth ahead with >55% YoY customer growth in 2021. We see potential for upside to this number coming from new dealers/sub-dealers, increased services per customer, and additional product offerings… Adding services per customer will allow NOVA to increase revenue generated for each customer added, and the addition of gen sets gives dealers’ sales reps another solution they can present when they sit down with a prospect (i.e. one more way to close a sale)…”
Consistent with these comments, Shen’s Buy rating comes with a $51 price target, implying an upside of 22% for the next 12 months.
Overall, Sunnova Energy has a Strong Buy rating from the analyst consensus, based on 7 Buys and just one Hold set in recent weeks. The stock’s recent strong share price gains have pushed it right up against the $42.56 average price target. (See NOVA stock analysis on TipRanks)
Canadian Solar (CSIQ)
For the last stock, we turn to the Great White North. Canada may not be the first place that anyone thinks of when contemplating sunny days, but Canadian Solar, based in Guelph, Ontario, has operations in 150 countries around the world, with over 16 gigawatts in the project pipeline. Canadian Solar produces photo-voltaic systems for utility-scale projects, and to-date has delivered over 52 gigawatts of solar modules globally.
In the recently reported third quarter, CSIQ showed 31% sequential revenue growth, to $914 million, bringing the top line back to pre-corona levels – and beating the $840 million to $890 million guidance estimate by a wide margin. Gross margins, at 19.5%, were well above the 16% forecast. The 3.2 gigawatts of solar shipment also exceeded expectations. The company expects growth to continue next year, and is guiding toward 18 to 20 gigawatts of shipments in 2021.
Like the other stocks on this list, CSIQ has seen its strong financial performance equate to strong share performance. The stock is up 87% year-to-date, nearly doubling its value, with two weeks’ trading left in the year.
Philip Shen agrees that the company is likely to see further gains. The analyst gives CSIQ shares a Buy rating, and his $50 suggests a 21% upside potential. (To watch Shen’s track record, click here)
“CSIQ is planning its capacity expansion to accommodate both the 182mm and 210mm formats, rather than limiting itself to one standard or the other. The new formats could lead to higher pricing and lower costs over time and support the margin expansion expected in the back half of 2021,” Shen noted.
All in all, there are 7 reviews on file for Canadian Solar, breaking down to 5 Buys and 2 Holds, making the analyst consensus rating a Moderate Buy. The stock is trading at $41.36, and its $45.71 average price target implies a 10.5% upside. (See CSIQ stock analysis on TipRanks)
To find good ideas for solar stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
