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The solar equipment industry is “near an inflection point,” and sentiment will improve as more tangible signs of stability emerge, RBC Capital said Wednesday as it initiated coverage of First Solar (NASDAQ:FSLR), Enphase Energy (ENPH) and Shoals Technologies (SHLS) with Outperform ratings.
The industry “should continue to benefit from a positive rate of change and will continue to see long-term support from public policy, emissions regulation and declining costs,” even as both residential and utility scale solar face headwinds in the near term, RBC’s Christopher Dendrinos says.
“However, we see a potential turning point in investor sentiment, as the bottom of the demand slowdown is being set and expectations for declining interest rates support improving payback periods,” the analyst writes.
Solar projects can be 3x more sensitive to interest rates than conventional energy projects, which “positions the solar industry to be a large beneficiary of interest rate cuts,” according to Dendrinos, who also estimates “the levelized cost of energy for solar improves by greater than 4% for every 50 basis point cut in interest rates.”
The analyst taps First Solar (FSLR) as the top pick in the sector, citing “strong earnings visibility and free cash flow optionality,” and expecting the stock will continue to outperform given uncertainty for residential solar demand.
Dendrinos also likes Enphase (ENPH), citing “industry leading differentiated technology, and Shoals (SHLS), which trades below peers “despite superior margin profile and growth.”
The analyst rates SolarEdge Technologies (SEDG) at Market Perform, believing overhead is “a margin headwind given current demand.”
All four stocks rose sharply in Wednesday’s trading: SolarEdge (SEDG) +7.9%, Enphase (ENPH) +6.5%, Shoals (SHLS) +4.6%, First Solar (FSLR) +3.8%.
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