2023-10-24 14:17:13 ET
Summary
- Array Technologies, Inc.'s share price has declined slightly due to pessimism around renewable energy, but I believe this pessimism will be short-lived.
- The company specializes in solar tracking systems, such as the DuraTrack and SmarTrack systems, which enhance efficiency and productivity.
- Array Technologies has strong earnings with YoY revenue growth of 21% and positive free cash flow, making it an attractive investment opportunity.
Investment Rundown
The share price of Array Technologies, Inc. (ARRY) has declined slightly since my last article on the company back in late June. Since then there is been a lot of pessimism around the renewable energy space as the cost of financing and funding projects has heavily increased as a result of the higher interest rates in both the US and in the rest of the world. I am writing an update article on the company as I think the short-term pessimism around solar and renewable companies is going to be short-lived. We saw in earlier weeks how major companies like SolarEdge Technologies Inc (SEDG) lost quite large amounts of market cap as their valuations were cut following softer demand in certain regions. Once rates decline I think funding will be much more readily available for companies like ARRY and that will ignite the share price. I still view the company as a solid buy even after some of the market volatility we have seen especially as the share price is now slightly lower than when I first issued a buy for them.
Company Segments
ARRY is a global player with operations spanning the United States and international markets. Their primary focus revolves around the design and production of cutting-edge solar tracking systems, tailored to enhance the efficiency and productivity of solar modules. Among their standout offerings, the DuraTrack and SmarTrack systems hold a central role in achieving this objective.
The DuraTrack system is a single-axis solar panel solution renowned for its exceptional maneuverability. This dynamic panel boasts the capability to seamlessly adjust its position as the day progresses, ensuring continuous alignment with the sun. This adaptability plays a pivotal role in harnessing the full potential of solar radiation, resulting in optimal energy generation and exceptional efficiency. The product is boasted to be 25% less labor-intensive to install making it less costly to fund large projects and sites for them. On top of this, the product is also set to generate roughly 5% more energy per acre in comparison to more traditional solar panels according to the company presentation. I think these are the key advantage that makes ARRY look incredibly appealing as a large partner for major energy corporations but also as one of the more cost-effective options.
In addition to the remarkable DuraTrack system, Array Technologies offers powerful SmarTrack software, which serves as a pivotal component in their comprehensive solar solutions. SmarTrack is a sophisticated software platform meticulously crafted to enhance solar panel positioning. It accomplishes this by employing intelligent algorithms and data analysis to calculate the optimal orientation for each solar panel within the array.
When combined, the DuraTrack solar panel and the SmarTrack software form an integrated and all-encompassing solution from ARRY. Through the integration of advanced technology and innovative design, ARRY empowers its clients to unlock the full potential of solar energy. Boosting the company's manufacturing capabilities has been key partnerships with some US suppliers like Extruded Aluminum Corporation and Steel Dynamics which has ultimately made ARRY into a leading company in the US in terms of sourcing materials from the region. I think this underscores how ARRY is portrayed as an almost US pure-play renewable energy opportunity right now. The Inflation Reduction Act was a strong tailwind for the industry and something that will benefit ARRY and many others with increased funding going their way.
Earnings Highlights
We are not that many weeks out from the next earnings report by ARRY and I think a lot of investors are going to be looking at how demand pans out for the quarter and if any noticeable trends are appearing, I know I will at least. On November 7 after the market, the Q3 results will be released.
Earnings Report
Recapping the l ast quarterly results we see the revenues landing at $507 for the quarter. This represented a strong 21% YoY growth rate for the business and I do think that Q3 will need to show similar momentum if there is to be a rapid increase in the share price. In my view, I think we will land somewhere between $480 - $520 million in revenues which would equate to roughly $2 billion in annual revenues, and with the company just valued at $2.6 billion right now it doesn't equate to a significant p/s premium, just 1.3 on an FWD basis, a very fair multiple to pay in my view, just roughly 5% above the sector median. What you have to remember is that ARRY is a growth company and I have strong conviction it will post top-line growth rates of over 12% annually for the next decade at least. Supporting this is the fact so much capital is going towards funding renewable energy projects which creates an eager customer base for ARRY to tap into.
Earnings Report
What I liked in the last quarter was the positive move in the FCF of the business as they are now positive. This represents a $121 million improvement YoY. But perhaps more impressively was the margin expansion even as interest rates rose in the last 12 months at almost unprecedented levels. Net income landed at close to $110 million and with ARRY being far ahead of many other solar companies in terms of bottom-line margins the next report will have to show supporting evidence that ARRY can maintain these margin levels. It has a TTM net margin of over 7% which is far above SunPower Corporation ( SPWR ) for example which is under 3.5% right now.
As for my price target on ARRY, I think given the momentum it has had so far even as rates have increased a fair p/s seems to be around 1.8 in my opinion. That is where I would be comfortable still buying at, meaning there is additional upside from today's price levels, roughly 42% still if we are to hit a p/s of 1.8 as the share price would be around $24.12.
Risks
The solar energy industry heavily depends on financing to facilitate the initial capital investment for constructing solar energy plants. Consequently, any increase in interest rates or a decrease in the accessibility of project debt or tax equity financing can significantly impact the number of solar projects that secure funding.
Moreover, these financial shifts can present formidable challenges for clients or clients of clients seeking to obtain the necessary financing for their solar energy projects under favorable terms or, in some cases, to secure financing at all. This heightened financial uncertainty underscores the importance of monitoring the financial landscape in the solar energy sector to ensure the viability of such projects.
Final Words
I have covered ARRY before and I remain quite bullish on the outlook of the business. The company has had the share price reduced slightly since my last converge in late June but hasn't been hit nearly as much as some other solar and renewable companies. I think going into the next earnings report in a few weeks the spotlight will shine on YoY revenue growth and margin retention for ARRY, some things that I am positive that they will impress on. I am reiterating my buy rating for the company and view it as one of the better US pure-play renewable energy opportunities right now.
For further details see:
Array Technologies: Short-Term Market Pessimism, Long-Term Buying Opportunity