President Joe Biden’s Inflation Reduction Act (IRA) includes tax incentives to boost domestic solar manufacturing. However, U.S. manufacturers are waiting for clarification on whether additional incentives for sourcing U.S. materials would apply to products that contain some imported components.
Moreover, Edurne Zoco, Executive Director, Clean Technology & Renewables, S&P Global Commodity Insights, believes that the incentives are encouraging but are “not to the scale the U.S. market needs.”
Solar tracking systems and related products manufacturer Array Technologies, Inc. (ARRY) has surpassed analysts’ third-quarter topline and bottom-line expectations. It topped the consensus EPS estimate by 77.4% and the revenue estimate by 29.8%.
The stock has declined 22.5% over the past year. However, it has gained 31.1% year-to-date to close its last trading session at $20.57. It has surged 29.1% over the past five days.
However, is the stock a buy now? Let’s find out:
Strong Financials
For the fiscal third quarter ended September 30, ARRY’s revenue increased 173% year-over-year to $515.02 million. Its gross profit rose significantly from its year-ago value to $80.22 million. Its adjusted net income and adjusted net income per share came in at $27.98 million and $0.18, up 337.2% and 300% from their year-ago values, respectively.
Stretched Valuation
In terms of forward non-GAAP P/E, ARRY is trading at 57.15x, 229.1% higher than the industry average of 17.37x. The stock’s forward EV/EBITDA multiple of 32.61 is 202.2% higher than the industry average of 10.79. In terms of its forward Price/Book, it is trading at 35.03x, significantly higher than the industry average of 2.65x.
Wall Street Analysts Expect Upside
Eight Wall Street analysts have rated ARRY in the last three months. Six of them rated it a ‘Buy,’ one rated it a ‘Hold,’ and one rated it a ‘Sell.’ The 12-month median price target of $27 indicates a 31.3% potential upside. The price targets range from a low of $16 to a high of $33.
Weak Profitability
ARRY’s trailing-12-month gross profit margin and its EBITDA margin of 10.79% and 1.91% are 62.9% and 85.3% lower than the industry averages of 29.09% and 13.02%, respectively. Its trailing-12-month ROCE, ROTC, and ROTA of negative 158.15%, 3.69%, and 0.50% are considerably lower than their respective industry averages of 14.31%, 6.83%, and 5.32%.
POWR Ratings
ARRY has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. ARRY has a Growth grade of A, in sync with its solid financial performance in the last reported quarter. The stock has a D grade for Value, consistent with its higher-than-industry valuation multiples.
The stock has an F grade for Stability, in sync with its five-year beta of 1.94.
In the 21-stock Solar industry, it is ranked #6. The industry is rated F.
Click here to see the additional POWR Ratings for ARRY (Momentum, Sentiment, and Quality).
View all the top stocks in the Solar industry here.
Bottom Line
Government incentives are expected to bolster prospects for the domestic solar industry. However, gains from these incentives are expected to take some to materialize. Moreover, although ARRY has managed to beat expectations in its last reported quarter, its negative ROCE and high valuation are concerning. Hence, it could be wise to wait for a better entry point in the stock.
ARRY shares were trading at $19.73 per share on Monday morning, down $0.84 (-4.08%). Year-to-date, ARRY has gained 25.75%, versus a -15.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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