A comparables analysis doesn't show anything to me, as there are few companies listed in the sector, providing no representative data.
Strong latest quarterly results are difficult to compare with last year's figures, as numbers were heavily affected by an acquisition.
The company has to prove growth prospects to level out risks common shareholders face.
The increasing concern about reducing the dependency on fossil fuels and minimizing carbon footprint dictates the demand for renewable energy and its sources. Today I would like to analyze Array Technologies ( ARRY ), the company that optimizes solar energy projects. It was above $45 per share at one point and as low as $6 stabilizing in the mid-20s recently with promising quarter results.
Despite the "Strong Buy" Quant rating and rosy pictures analysts are painting, I doubt the current market price and think that it is overvalued. Comparing its past performance, moving with peer analysis and solar power market developments, I will end up with the statements projection and give my price target.
Company Overview
ARRY is based in the US and it is one of the largest manufacturers of ground-mounting systems used in solar energy projects in the World. Basically, it is a "tracker" that moves solar panels through the day to optimize orientation to the sun, thus generating more energy, up to 25% (according to the company's info). ARRY product has a patent design, that allows one motor to drive multiple rows of solar panels. This results in greater efficiency and reliability with lower installation costs. The patent on linked-row doesn't expire until February 5, 2030.
US solar power equipment company went public in 2020 at $22, which was above its target range. Since then, shareholders had ups and downs with the current price of $25.15 and a 1-year Total Return of 22.5% .
1 Year Total Return ARRY (SeekingAlpha)
In 2022, they acquired STI , adding dual-row tracking to their portfolio. STI is based in Spain and validates the company's goal for expansion outside the US market.
Peer analysis and sector performance
According to several researchers, the global solar power market size is poised to grow at a compounding annual growth rate ((CAGR)) from as low as 6.9% to more than 7.2% from now till 2030.
Forecast 2020-2030 Solar Power Market Size (fortunebusinessinsights)
Growing fossil fuel prices and governmental favorable policies together with technology costs and output efficiency should be long-term drivers for market expansion. The global solar tracker market size is projected to grow with a higher CAGR of 13.9% by 2030 .
Product manufactured by ARRY is highly specialized, requiring unique expertise and patents. Main tracker competitors (according to the company's info) are: Nextracker Inc.( NXT ), PV Hardware, GameChange Solar, and Arctech Solar ( 688408.SS ) . Array Technologies also competes with the producers of fixed tilt mounting systems, including UNIRAC Inc., and RBI Solar Inc. Few of them are traded in the stock exchange, making it difficult to compare the companies.
As can be seen in the table with a small number of companies average figures are saying nothing to us. This brings me to stick with the alternative valuation methodology. Before that, I have to mention that Arctech Solar provides revolutionary technology in the industry with a new generation of artificial intelligence solar tracking systems. This enables one to adapt to diverse conditions, including weather and terrain peculiarities. With a Total Return (1 year) of around 43%, it is trading at P/E 20.3 and might be a fierce competitor to ARRY.
The company provided further revenue growth, but what is more important -gross margin increase. Mostly, the increase was driven by STI Operations , offsetting a slight decline in Array Legacy Operations.
H1 2023
2022
2021
2020
2019
Cost of sales
71.60%
86.12%
90.29%
76.76%
76.73%
Gross margin
28.40%
13.88%
9.71%
23.24%
23.27%
Operating expenses
General and administrative
8.86%
9.21%
9.49%
6.38%
6.36%
Depreciation and amortization
3.06%
6.05%
2.80%
2.92%
3.94%
Despite the second quarter revenue increase, ARRY expects sales to be in line with last year`s numbers, but gross margin in the mid-20s. As we remember last year`s results were affected by the STI acquisition, resulting in higher cost of sales and additional depreciation expenses. Moreover, the cost of input materials was higher. Thus, I expected higher revenue figures this year (lower bound revenue guidance is less than a 1% increase compared the last year). "The increase in gross profit as a percent of revenue was driven by an improvement in pass through pricing to customers, in addition to cost savings opportunities in logistics and raw materials, as well as a higher proportion of higher margin non-tracker revenue."
Doesn't impress me either, when you hear it from the tracker manufacturer. Annual revenue guidance was lowered and lower-bound is in line with last year`s performance.
2023 Guidance (Array Technologies Earning Call)
Risks
There are several risks concerning the outlook. If all the governmental benefits are discontinued it may affect significantly the green energy segment. Thus, if the demand for solar energy projects won't continue or will continue at a slower pace, ARRY business will suffer. Uncertainties on global financial markets and increasing inflation will continue to affect interest rates increasing the costs.
The Russia-Ukraine conflict disrupts the supply chain putting pressure on growth and profitability. The cost of products is affected by the underlying cost of raw materials, including steel and aluminum.
Megawatts (MW) shipped is a primary metric to evaluate sales performance, further reduction due to delays in projects (affecting a 1% decline this quarter), can further decrease yearly revenue.
As the company is gaining recognition, there is a higher risk of becoming subject to claims infringement regarding patent violations.
Valuation methodology
I used the same methodology as in my previous article . The only difference is that I forecasted balance sheets till 2030 to take into consideration the accelerated growth of the sector. The required return is WACC-calculated. Balance inputs depend on the sales figures of the company.
Valuation inputs and results
With 6 months of sales of $884mln. I have almost no doubts that the company will reach its lower-bound forecast for the year-end, which is $1.65bln . As research suggests, the market will be increasing by 13.9%, thus the same growth rate was used in the calculations with gross margins increasing to reach median figures. For the income tax federal statutory rate of 21% (provided from the annual statements) was used. The required return is WACC- calculated and equals 7.87% now.
Year
2022
2023E
2024E
2025E
2026E
2027E
2028E
2029E
2030E
Tax rate
21%
21%
21%
21%
21%
21%
21%
21%
21%
Sales
1637546
1650000
1881000
2144340
2444547.6
2786784.3
3176934.1
3621705
4128743.5
Cost of sales
1410270
1237500
1391940
1565368.2
1784519.748
2034352.5
2319161.9
2643845
3013982.8
Operating expenses
249916
136125
153113.4
172190.5
196297.1723
223778.78
255107.81
290822.9
331538.1
Core operating income (before tax)
-22640
276375
335946.6
406781.3
463730.6797
528652.97
602664.39
687037.4
783222.64
In Thousands of US Dollars ((USD))
Next, I forecasted the return on net operating assets and found the difference between it and the WACC-required return. The growth rate used for a continuing value is an average US GDP growth rate .
Year
2022
2023E
2024E
2025E
2026E
2027E
2028E
2029E
2030E
Return On Net Operating Assets ((RNOA))
16%
17%
17%
17%
17%
17%
17%
17%
Residual Operating Income (ReOI)
92770
111892
128702
156043
177889
202793
231185
263550
Growth in ReOI
21%
15%
21%
14%
14%
14%
14%
Discount rate
1.08
1.16
1.26
1.35
1.46
1.58
1.70
1.83
Discounted ReOI
86002
96161
102538
115250
121800
128721
136036
143767
Total Present Value ((PV)) of ReOI
1066217
Continuing value ((CV))
4579580
PV of CV
2315899
NOA 2022
1053087
Value of operations
4435203
Net Financial Obligations
928806
Value of equity
3506397
Number of shares
150607
Value per share
23.3
In Thousands of US Dollars ((USD)) except per share items
Valuation risk
The growth rate is outsourced from the solar tracker market research, even a slight change will affect the price. If the growth rate continues to rise this year, it will result in a higher price target. Calculations don't include options outstanding which will lower slightly the price target. Due to accounting principles, some of the figures I used in my reformulation might be slightly off, but I tried to minimize their influence. The latest quarter statements and annual statements lack some disclosure, for example, product margins are not disclosed, making it difficult to forecast the performance -- although this had only a minor effect on my calculations. WACC calculations are outsourced, but reasonably match my own.
Conclusion
With the current market price of $25.15, it seems to me overvalued. My price target of $23.3 doesn't include options outstanding. Moreover, the effect of Convertible Notes is difficult to price in. Due to last year`s acquisition, it is difficult to understand how margins have changed. The new agreement with Steel Dynamics may positively affect the cost of sales, but this effect should be monitored. The company has to prove its sales and margin growth to support the overall market growth forecasts. The maximum rating that I can give right now is "Hold".
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ALBUQUERQUE, N.M., July 18, 2024 (GLOBE NEWSWIRE) -- Array Technologies (the “Company” or “Array”) (Nasdaq: ARRY) today announced that the company will release its second quarter 2024 results after the market close on Thursday, August 8ᵗʰ, 2024, to be fol...
ALBUQUERQUE, N.M., July 16, 2024 (GLOBE NEWSWIRE) -- Array Technologies (NASDAQ: ARRY) (“Array” or “the company”), a leading provider of tracker solutions and services for utility-scale solar energy projects, has published its fourth annual ESG and sustainability discl...
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