With concerns related to global warming, renewable energy sources and solar stocks have been in the limelight. In the United States, renewable energy constitutes 19% of the total energy share for the current fiscal year. By fiscal year 2050, the share of renewable is expected to increase to 38%. Among the renewable sources, solar energy is likely to witness the strongest growth.
The trend is likely to be similar for other parts of the world. It’s expected that 142GW of solar capacity will be added globally for the current year. Furthermore, the International Energy Agency expects “spectacular growth over the next 5 years” in the solar PV market.
Considering these expectations, solar stocks are likely to be in focus in the coming years. Importantly, few quality solar stocks can be value creators for investors.
This column will discuss three quality names in the industry. I believe that these solar stocks can brighten the portfolio.
Canadian Solar (CSIQ)
Canadian Solar is one company that is well positioned to benefit from the strong growth in the sector. One reason to like the company is its gradual improvement in margins as the company scales-up. From gross margin of 14.6% in FY2016, the company’s gross margin has improved to 22.4% in FY2019.
Operating level profits have translated into higher cash flows and deleveraging. From net-debt-to-EBITDA of 8.5 in FY2016, the company’s leverage has declined to 2.8 in FY2019. Further, with a strong cash buffer of $1.2 billion, the company is well positioned to grow as the demand for solar energy accelerates globally.
It’s worth noting that the company has a total solar project backlog and pipeline of 15.4GW. This provides a clear cash flow visibility for the coming quarters. With order intake likely to remain strong, margin expansion will continue along with cash flow growth.
Another factor to be bullish on CAIQ stock is the company’s strong presence in Japan. The company has a leading position as a module supplier in the most highly-priced solar module market. The company is just behind Panasonic as a residential solution supplier in the country. With accelerating growth in Japan, the company’s EBITDA margin will expand.
First Solar (FSLR)
FSLR stock has moved higher by 19% in the last month and I believe that the positive momentum is likely to stay.
First Solar is another company with a healthy order backlog of 12.3GW and this provides revenue and cash flow visibility. The company’s order intake has also been strong with Series 6 driving growth. As a matter of fact, the company has a potential pipeline of 7.5 GW. As this converts to backlog, growth is likely to accelerate.
From a financial perspective, the company had cash and equivalents of $1.6 billion as of first quarter of 2020. In addition, with long-term debt of just $472 million, the company has ample financial flexibility. The capital expenditure for Series 6 manufacturing plant is pegged at $450 to $550 million. This is likely through internal cash flows.
Therefore, with a strong backlog, robust balance sheet, global presence, and industry growth visibility, First Solar is attractive. I therefore believe that FSLR stock can continue to trend higher in the medium to long-term.
Enphase Energy (ENPH)
The last of the solar stocks in this list is Enphase Energy. Enphase identifies itself as an energy technology company and a leading supplier of solar microinverters. ENPH stock has surged by 201% in the last year with the company reporting robust growth. Even after the big rally, I believe that the stock is worth considering on small corrections. The uptrend is likely to sustain.
To underscore my point on top-line growth sustainability, Enphase Energy is bullish on residential solar. The company believes that the serviceable addressable market in the segment will increase from $3.3 billion in the current year to $12.5 billion by FY2022. This provides scope for top-line and profitability growth in the coming years.
Another growth trigger for the company is its expansion plans is Europe. The company plans to enter eight countries this year and triple the headcount. This should accelerate growth in the coming years. The company also plans to make inroads in India’s off-grid market.
It’s worth noting that based on Q1 2020 operating cash flows, Enphase Energy is positioned to report annualized operating cash flows of $150 to $160 million. Strong cash flows give the company ample scope for expansion and shareholder value creation.
Overall, Enphase Energy is worth considering among solar stocks. The company is likely to remain in a high growth trajectory for the coming years.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
