Array Technologies (NASDAQ:ARRY) went public on Oct. 15 at an IPO price of $22.00 per share and shot up to $38.95 by the close on Oct. 16. It looks like Array Technologies stock will be a winner even though it’s not that really an exciting technology company. However, the next best move for investors might be to invest in the stock of a competitor.
The company makes equipment that optimizes large solar projects, such as ground mounting gear and equipment. This is frankly not “high” technology. It is a regular or low technology company in a fast-growing industry.
One of the key advantages of their technology is that solar panels can track the sun during the day. This adds up to 25% more electricity production performance.
But what the company really has going for itself are fast-growing revenue and profits. In addition, its valuation is not unreasonable and has room to grow.
Fast-Growing Financial Performance
For example, the company’s prospectus filed on Oct. 16 shows that revenue in 2018 was $290.8 million. This grew leaps and bounds $647.9 million by 2019.
Moreover, Array’s revenue in the first half of 2020 was $552 million. This puts it on track to make over $1.1 billion in 2020. That represents a gain of over 70% in 2020.
Array Technologies is extremely profitable. For example, its net income profits were $21.457 million in 2019. That worked out to 17 cents per share on a pro forma basis (as if the company was already public). However, by the first half of 2020, its earnings per share (EPS) had grown to 57 cents. This puts the stock on a projected EPS rate of at least $1.14 for 2020. That represents a huge growth rate over 2019.
In its prospectus, the company claims it has orders for $703 million of executed contracts and awarded orders as of Sept. 30. This represents a 30% increase over the prior year. Therefore it is reasonable to assume that its profit growth will be at least 30% or more for next year. That puts the forecast EPS for 2021 at $1.48.
Array Technologies projects that a key driver for its ground-mounted solar trackers will increase dramatically over the next four years. They produce a chart on page 73 of the prospectus showing that annual installations of ground-mounted solar in the U.S. will grow quickly. The installations start at 10,919 megawatts (MW) in 2019 and grow to 19,550 MW by 2023.
That total 79% growth rate represents an average annual compound growth of 12.35% per year. A good deal of that will spill over to Array Technologies in large systems orders.
Reasonable Valuation
The forecast EPS for 2021 puts Array Technologies on a price-to-earnings (P/E) ratio of just 26.3 times. That is a reasonable valuation for a fast-growing company with huge growth prospects.
One analyst on Seeking Alpha, The Value Investor, had a positive review. Another article in Seeking Alpha, from the IPO Edge, also suggested that the stock was “reasonably valued” at its IPO price. TipRanks.com reports that no Wall Street firms have yet published any research on the stock.
By the way, if the company had chosen to do a SPAC (special purpose acquisition company) the investing public would have a much better idea where profits stand.
Typically in SPAC merger deals the target company provides a detailed slide presentation that shows a multiple-year forecast of its growth and profits. In addition, many SPAC deals provide a comparable valuation analysis. This is one reason why SPAC stocks with completed mergers in hot fields like renewable energy have done so well.
Moreover, the IPO process tends to prohibit Wall Street firms from issuing research reports on the stock until their blackout periods end. This is not so with SPAC mergers, where there are fewer Street firms involved in the institutional PIPE offerings related to the mergers.
That frees up more sell-side brokers to write up the SPAC stocks. In the end, this helps with the stock performance for the SPAC stock.
What to Do With Array Technologies Stock
Most of the articles in the press on Array Technologies stock are impressed with the company’s IPO price performance. But there has been little analysis of the company, its prospects, and other aspects of the company that are important.
However, Barron’s reported on Friday that Flex Ltd (NASDAQ:FLEX) owns a large competitor to Array Technologies. That division is called Nextracker. Flex does not produce the internal results for Nextracker, but apparently, it is the largest solar-tracking company in the world.
Given that Array Technologies has a $4.95 billion market value, it would behoove Flex, with only a $7 billion market value, to consider spinning off, or carving out a public stake in Nextracker.
Therefore, after reading the Barron’s article, it seems to me that the best play here, frankly, is to look at buying Flex stock instead of Array Technologies stock.
For example, if they started publishing the financials for their solar-tracking division, which is larger than Array Technologies, Flex stock might rise in value. Investors would anticipate a shareholder-enhancing action by the board of Flex.
That is likely the next best money-making path for investors who like this space.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
