SHLS - Shoals Technologies: Product Innovation Fostering Growth

2023-05-30 21:41:48 ET

Summary

• Shoals has been able to capitalize on long-term trends of renewables.
• In its recent earnings release, Shoals displayed excellent growth prospects.
• The company's constant innovation of products has created a competitive edge.
• Assuming my DCF figures, Shoals is currently undervalued, resulting in a buy rating.

Shoals Technologies Group Inc. ( SHLS ) has demonstrated rapid growth through the renewables shift. I believe that Shoals stock is a buy due to its promising growth prospects, constant innovation of products to outpace competition, and undervaluation assuming my DCF figures.

Business Overview

Shoals Technologies specializes in offering electrical balance of system (EBOS) solutions and components for various applications such as solar energy, battery energy, and electric vehicle charging within the United States. The company's product line encompasses a wide range of EBOS components, including cable assemblies, inline fuses, combiners, disconnects, recombiners, wireless monitoring systems, junction boxes, transition enclosures, splice boxes, and wire management solutions. Shoals Technologies Group primarily targets engineering, procurement, and construction firms that are involved in the construction of solar energy projects as its main customer base.

Shoals Technologies Group, Inc. currently holds a market capitalization of $4.01 billion. The company has been experiencing consistent growth in its return on invested capital, which stands at 13%. The stock price of Shoals is currently trading at $23.63, which is close to its 200-day moving average of $24.02 and had a 52-week high and low price of $32.43 and $13.92, respectively. With a P/E GAAP of 26.8 based on GAAP earnings, Shoals is valued moderately, positioned between its peers in terms of P/E comparison.

Shoals does not pay a dividend, but instead uses its high return on invested capital and large free cash flow to expand its main business. This tactical approach enables the business to take advantage of market opportunities and successfully capture market share. Shoals is in a good position to profit from the rising demand for solar energy, battery energy, and electric vehicle charging options by concentrating on the transition to renewable energy sources. The company's dedication to seizing opportunities in the changing energy landscape and generating long-term value for its stakeholders is highlighted by this choice.

Shoals has surpassed expectations in its Q1 2023 results, achieving earnings per share of $0.10, surpassing estimates by $0.04, and generating revenue of $105.09 million, exceeding expectations by $7.53 million. This performance reflects a remarkable 54.6% year-on-year growth in revenue, demonstrating Shoals' ability to outperform in a challenging economic environment. The company's success can be attributed to its focus on growing its core operations while improving profitability.

Looking ahead, Shoals has provided revenue guidance for 2023, expecting it to be in the range of $480 million to $510 million. Additionally, the company anticipates adjusted EBITDA to be in the range of $145 million to $160 million and adjusted net income to be in the range of $92 million to $102 million. These projections highlight Shoals' confidence in its ability to capitalize on industry trends, innovate its products, and maintain competitiveness in a dynamic market.

Shoals Compared to the Broader Market

Shoals has demonstrated consistent performance aligned with the broader market over the past two years. Based on its recent performance and robust guidance, I anticipate that the company will continue to outperform in the future, leveraging the opportunities presented by long-term renewable energy trends.

Constant Product Innovation Fostering Growth

As a critical component of its goal to maintain its position as a leader in the solar energy sector, Shoals Technologies Group, Inc. places a strong emphasis on product innovation. The business is constantly working to expand its present product line and create new EBOS (electrical balance of systems) solutions.

The launch of the Smart Combiner Box technology is one instance of product innovation from Shoals Technologies Group. A cutting-edge solution that combines tracking, testing, and security features into one unit is the Smart Combiner Box. It makes it possible to monitor solar energy systems in real-time, finding any potential problems or flaws and guaranteeing the best possible system performance. The Smart Combiner Box improves efficiency and reliability while lowering the need for inspections by hand and solar installation downtime.

Shoals Technologies Group has also concentrated on improving its product lineup to meet the changing demands of the solar industry. For instance, the business has created and improved its EBOS systems to be compatible with a variety of solar panel kinds, sizes, and configurations as solar panel technologies have matured. Regardless of the particular panel technology they select, clients may simply include Shoals Technologies Group's solutions with their renewable energy projects thanks to this adaptability.

Shoals Technologies Group seeks to offer cutting-edge solutions that enhance the effectiveness, dependability, and efficiency of solar energy systems with its product development strategy. The business may fulfill changing client expectations and keep a competitive edge in the market by being on the cutting edge of technical developments and taking on industry trends.

Analyst Consensus

Shoals is currently rated as a "buy" by analysts, indicating that the company's long-term prospects are recognized and valued. The average one-year price target of $31.53 suggests a potential upside of 33.45%, further highlighting the positive outlook for the stock.

Valuation

Before formulating my assumptions and conducting my discounted cash flow analysis, I will determine the Cost of Equity and the weighted average cost of capital for Shoals using the Capital Asset Pricing Model. Taking into account a risk-free rate of 3.81%, which corresponds to the yield of a 10-year treasury, I have determined that the Cost of Equity is 8.34%, as demonstrated below.

Based on the given Cost of Equity value, I have computed the weighted average cost of capital to be 8.04%, as indicated below. This figure is lower than the industry average of 8.93%.

Using a Firm Model DCF analysis with FCFF without CapEx, I have determined that Shoals is currently undervalued by 9% with a fair value estimate of approximately $25.97. To arrive at this valuation, I considered a discount rate of 8.04% over a 5-year period. Additionally, I incorporated projections of substantial revenue growth as the company continues to scale rapidly. I anticipate that Shoals will persist in improving its product offerings and effectively capitalize on the transition to renewable energy, leading to expanded profit margins in the coming years.

Risks

Supply Chain Disruptions: Shoals sources its resources and component parts through a convoluted supply chain. Any delays or shortages in the supply chain could make it more difficult for the business to complete client orders, which would have a negative impact on operations.

Regulatory and Policy Changes: Government rules and regulations pertaining to renewable energy have a big impact on the market. Regulations, incentives, and subsidies may change, which could impact how much demand there is for Shoals' goods and services. For the company, adapting to changing regulatory environments can be difficult.

Conclusion

To summarize, I believe that Shoals is a buy due to its promising future, constant innovation of products, and undervaluation assuming my DCF figures.

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