FLEX - Nextracker: What's Next After Flex?

2023-11-24 01:23:05 ET

Summary

• Nextracker's shares have performed well since its IPO in February, benefiting from a strong earnings report and a positive outlook.
• The company's former parent company, Flex, plans to divest all of its shares in Nextracker, which raises caution in the near term.
• NXT has seen success as a publicly listed company, but the current headwinds in the solar industry may impact its future performance.

In June of this year, I believed that shares of Nextracker ( NXT ) were tracking higher, with shares performing well since the business was spun off from Flex ( FLEX ) in an IPO that took place in February of this year.

Shares benefited from a strong fourth quarter earnings report and an upbeat outlook for the fiscal year 2024. Liking the performance of the business, I feared the overall demanding valuation, as not all solar-related businesses have been able to create shareholder value in a sustained way, certainly not in recent times.

The company has seen a very successful first year as a publicly listed company as the share price action prompted its former parent company Flex to make plans to divest all of its shares here, which on the one hand is a good thing, but makes me cautious in the near term as well.

I wonder if now is a good time to be involved with Nextracker, given that other parts of the solar industry have been hurt by current headwinds in a substantial way.

Some Perspective

Nextracker is better known as the legacy solar tracker business of Flex, providing solar tracker hardware and software solutions that are used in utility-scale and ground-mounted solar projects. The company believes in these technologies, as it has the potential to generate up to 25% more energy than fixed-mounted ground systems.

Founded in 2013 by Dan Shugar, it was Flex that acquired the business in 2015 and has grown the business ever since. The business is best known for its NX Horizon Solution, with Nextracker claiming technical superiority with panels being controlled in independent rows.

The business went public at $24 per share, as the 145 million shares granted the business a $3.5 billion equity valuation, excluding a very modest net debt load. This valuation was applied to a business that posted $1.17 billion in sales in the year ending March 2020, with operating profits reported at $149 million. The company saw modest growth in 2021, a year in which revenues rose to $1.20 billion, with operating profits up to $159 million.

Revenues rose to $1.46 billion in 2022, yet operating profits were more than cut in half to $66 million. Operating momentum returned in 2023 as revenues rose 30% to $1.90 billion as reported in May. Operating profits recovered to $168 million, as this supported earnings power of around eighty cents per share. This momentum propelled shares to rise from an IPO price of $24 to the $40 mark by June.

More so, the company guided for fiscal 2024 sales to rise further to $2.1-$2.3 billion, with GAAP net earnings seen between $175-$205 million, working down to earnings of $1.30 per share, plus or minus ten cents. Growth is aided by the Inflation Reduction Act, as multiples narrowed to 30 times based on the outlook, still, a premium multiple is generally a good time for the solar industry. I was very cautious to attach a premium to the shares, certainly as many related businesses have undergone real boom and bust cycles (including their shares) in recent years.

Trading Flat

Since the summer, shares of Nextracker have traded in a $35-$45 trading range, with shares now trading flat compared to June, trading at $39 per share.

In July, the company reported a 19% increase in first quarter sales to $480 million with GAAP earnings of $64 million being particularly strong, as the backlog of the firm totaled $3 billion. The strong start to the year made the company up the full-year guidance by a hundred million to $2.2-$2.4 billion. Despite the hike in the sales guidance, the company maintained the earnings guidance for the year.

While shares of many solar companies have sold off in the fall on the back of the impact of higher interest rates hurting capital spending, as well as congestion in grids limiting adoption, Nextracker continued to post solid results. Second quarter sales rose as much as 23% to $573 million, with earnings of $81 million being equivalent to $0.55 per share.

The company now upped the midpoint of the full-year sales guidance by fifty million to $2.35 billion with full-year earnings now seen between $237 million and $266 million, a massive $61 million increase in the full-year guidance on that front. The company has actually built up a net cash position of $228 million thanks to retained earnings.

And Here?

Trading at $39, the 147 million shares of the company grant the business a $5.7 billion equity valuation or about $5.5 billion enterprise valuation. With GAAP earnings now seen at a midpoint of $1.70 per share, earnings multiples have come down to about 22-23 times earnings. This comes amidst a stagnant share price, but more so because of an impressive hike in the full-year guidance.

On top of the strong earnings power, investors are furthermore pleased with the news that its former parent Flex announced plans to fully spin off the remaining stake held by the firm in the business.

This is somewhat scary, not for the reason, or the fact that Flex still owns just over 51% of the shares, after the initial public offering and the secondary public offering, but more so for other reasons. Of course, there is every incentive for the majority shareholder to release good news about the business ahead of the sale of the remainder of its shares.

Given all of this, I am more upbeat on Nextracker than I have been for a while as the big increase in the full-year guidance is comforting, but comes at a time when many solar businesses are hurt. On the one hand, this shows the strong performance of the business (and its outperformance) but indicates that weakness could be seen at some point as well, as the same forces that impact peers and other industry players have an impact on Nextracker as well.

Amidst all this, I am taking a closer eye, not willing to pull the trigger here, as I am waiting for more input in the spin-off plans, as I simply fear a reversal of current fortunes to some degree going forward, making me hesitant to a pay a premium for the shares on an already solid performance.

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