Illuminating Potential: Three Solar Energy Giants
This week, we delve into the renewable energy equipment and services industry, specifically looking at companies that specialize in solar energy. Using AAII’s A+ Investor Stock Grades, we analyze some of the top players in the industry and show how they stack up against the rest of the investable universe.
In an era characterized by increasing environmental consciousness and the quest for sustainable energy possibilities, the solar energy sector has emerged as a beacon of hope. Solar power represents a pivotal role in the transition from fossil fuels to cleaner and renewable energy sources. This analysis examines three solar energy players — Enphase Energy Inc. (ENPH), First Solar Inc. (FSLR) and JinkoSolar Holding Co. Ltd. (JKS).
Solar Energy Stocks Recent News
Renewable solar energy is a vital industry that has gained significant momentum in recent years. It encompasses harnessing the energy of the sun to generate clean and renewable electricity that is used in all industries and households across the world. Solar energy plays a crucial role in addressing environmental concerns, reducing carbon emissions and transitioning toward a more sustainable future.
According to Fortune Business Insights, the global solar power market was valued at $167.8 billion in 2021 and $234.9 billion in 2022. The versatility of solar power is a distinguishing feature as its applications span residential, commercial and industrial sectors, with potential integrations in transportation and off-grid solutions. Last year, nearly 5% of U.S. energy production came from solar panels — almost eleven times more than 10 years ago, creating enough power for 25 million households. Accounting for 50% of all new electricity generation added in 2022, solar is also the fastest-growing source of new power production.
In late 2022, there was a decline in solar panel installations, primarily due to supply chain uncertainties after the U.S. launched an investigation into whether its imports of panels completed in four Southeast Asian countries were circumventing the antidumping duty and countervailing duty orders on solar cells in China. The Solar Energy Industries Association (SEIA) also said that “the U.S. Customs and Border Protection (CBP) has also detained solar equipment from China over new legislation against forced labor, which further stifled U.S. industry growth.” As of the middle of this year, the U.S. solar installation market is set to rebound, with one report projecting a broad market recovery , according to Wood Mackenzie. By 2029, the global market size is expected to reach $373.8 billion, growing at a compound annual growth rate (CAGR) of 6.9%.
There are a number of trends that suggest solar energy will continue to grow in the coming years. For example, the cost of solar photovoltaic (PV) panels has been falling rapidly in recent years, making it an increasingly cost-competitive form of energy. Plus, advances in technology have made it much easier to produce solar panels with higher efficiency, meaning each panel is able to generate more electricity from the same amount of sunlight. Bill Gates’ Breakthrough Energy Ventures is among the investors betting that scientific knowledge gained from the mineral perovskite, can lead to a new, even more efficient solar panel. Countries have also planned renewable energy targets and policies such as feed-in tariffs or renewable portfolio standards to encourage the usage of solar energy.
Grading Solar Energy Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three athleisure stocks — Enphase Energy, First Solar and JinkoSolar — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Solar Energy Stocks
What the A+ Stock Grades Reveal
Enphase Energy Inc. (ENPH) is a global energy technology company. It designs, develops, manufactures and sells home energy solutions that manage energy generation, energy storage and control and communications on one platform. Its Enphase Energy System brings a high technology, networked approach to solar generation, plus energy storage, by leveraging its design for power electronics, semiconductors and cloud-based software technologies. Its integrated approach to energy solutions increases a home’s energy potential while providing advanced monitoring and remote maintenance capabilities. Enphase Energy’s commercial systems have been deployed in approximately 145 countries.
The company has a Value Grade of F, based on its Value Score of 10, which is considered to be ultra expensive. Enphase Energy’s Value Score ranking is based on several traditional valuation metrics. The company has a percentile rank of 85 for the price-to-sales (P/S) ratio and a rank of 91 for the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA), with lower ranks indicating better value. The company has a shareholder yield of –1.0%, meaning it is increasing the number of shares available to purchase.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above, along with the price-to-free-cash-flow (P/FCF) ratio, price-to-book-value (P/B) ratio and the price-earnings (P/E) ratio.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Enphase Energy has a Quality Grade of A, with a score of 92, which is very strong. The company ranks strongly in terms of its return on assets (ROA) and buyback yield. Enphase Energy has a return on assets of 18.1% and a return on invested capital (ROIC) of 61.4%, both significantly above the energy sector median. The sector median for return on assets is only 4.5%.
Enphase Energy has a Momentum Grade of F, based on its Momentum Score of 16. This means that it has had very weak weighted relative price strength over the last four quarters. This score is derived from a below-average relative price strength of –22.7% in the most recent quarter, –22.3% in the second-most-recent quarter and –31.1% in the third-most-recent quarter, offset by above-average relative price strength of 4.5% in the fourth-most-recent quarter. The scores are 21, 32, 10 and 64, sequentially from the most recent quarter. The weighted four-quarter relative price strength is –18.8%, which translates to a score of 16. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
First Solar Inc. (FSLR) is a solar technology company and global provider of PV cell solar energy solutions. It manufactures and sells PV solar modules with semiconductor technology, which provides an alternative to conventional crystalline silicon PV solar modules. The company operates in two segments: modules business and other. Its modules business segment is involved in the designing, manufacturing and selling of CdTe solar modules, which convert sunlight into electricity. Third-party customers of the modules business segment include developers and operators of systems, utilities, independent power producers, commercial and industrial companies and other system owners. Its products include the Series 7 and Series 6 modules. The company’s manufacturing locations are in Malaysia, the U.S. and Vietnam. Its subsidiaries include First Solar Development LLC, First Solar FE Holdings Pte. Ltd. and First Solar Malaysia Sdn. Bhd.
First Solar has a Quality Grade of C, with a score of 46 which is considered average. The company ranks weakly on return on invested capital and gross income to assets, ranking in the sixth and 16th percentile of all stocks, respectively. The company has a return on assets of 1.9%, below the sector median of 4.5%. Additionally, the company’s return on invested capital of 2.7% is well below the energy sector median of 18.0%.
The company has a Value Grade of F, based on its Value Score of 7, which is considered to be ultra expensive. It has a percentile rank of 86 for the price-to-sales ratio and a rank of 94 for the EV/EBITDA ratio, with lower ranks indicating better value. The company currently trades with a price-earnings ratio of 137.3, ranking in the 95th percentile of all stocks.
First Solar has a Growth Grade of C, based on its Growth Score of 46. The company has increased its sales in two of the last five years and has positive cash from operations in four of the last five years. The company has a five-year average sales growth rate of –2.3%, which is significantly below the sector median of 13.3%.
First Solar has a Momentum Grade of A, based on its Momentum Score of 88. This means that it has had very strong weighted relative price strength over the last four quarters. This score is derived from an above-average relative price strength of 37.1% in the fourth-most-recent quarter, 5.9% in third-most-recent quarter and 29.7% in the second-most-recent quarter, offset by below-average relative price strength of –13.1% in the most recent quarter. The scores are 33, 95, 68 and 96, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 9.3%.
JinkoSolar Holding Co. Ltd. (JKS) operates in the PV industry, with a vertically integrated solar power product value chain. The company has only one operating segment, a solar power manufacturing business that produces products from silicon ingots, wafers and cells to solar modules. It has two overseas solar power projects located in Mexico and Argentina. The company sells its solar modules under the JinkoSolar brand. Its services include solar power generation and solar system engineering procurement construction and processing services.
The company has a Value Grade of B, based on its Value Score of 62, which is considered a value. JinkoSolar’s Value Score is based on several traditional valuation metrics. The company has a percentile rank of 4 for the price-to-sales ratio and a rank of 15 for the price-to-book ratio, with lower ranks indicating better value. JinkoSolar has a price-to-sales ratio of 0.14 and price-to-book ratio of 0.66, compared to the energy sector medians of 1.23 and 1.52, respectively.
JinkoSolar has a Momentum Grade of F, based on its Momentum Score of 20, which is very weak. This means that it has had very weak weighted relative price strength over the last four quarters. This score is derived from a below-average relative price strength of –22.2% in the most recent quarter, –20.8% in the second-most-recent quarter and –12.4% in the fourth-most-recent quarter, offset by above-average relative price strength of –0.5% in the third-most-recent quarter. The ranks are 21, 35, 54 and 36, sequentially from the most recent quarter. The weighted four-quarter relative price strength is –15.6%, which translates to a score of 20.
JinkoSolar has a Growth Grade of B, ranking in the 62nd percentile of all U.S.-listed stocks. The company has increased its sales on a year-over-year basis in four of the past five years, ranking in the 66th percentile. It has also realized sales growth of 25.7% on an annualized basis over the past five years, compared to the energy sector median of 13.3%.
JinkoSolar has a Quality Grade of D, based on its score of 22, which is weak. Stocks receive better grades for having higher scores for the quality subcomponents and worse grades for lower scores for the subcomponents. JinkoSolar’s return on invested capital of 7.4% ranks in the 21st percentile of all stocks. The company also has a change in total liabilities to assets of 13.7%, ranking in the 17th percentile of all U.S.-listed stocks.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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