Solar earnings are on deck after a lackluster first half. Here’s what to watch

Published Tue, Jul 27 202112:40 PM EDT

Solar stocks are coming off a tough first half of the year after finishing 2020 as one of the year's top trades. As the group reports quarterly earnings, here's what Wall Street analysts say investors should be watching. Rising costs Management commentary around the impact of rising costs will be key, since part of the group's recent weakness is due to investor concerns over pricing pressures and supply chain bottlenecks. During the first quarter, SolarEdge and Enphase both saw their stocks tumble as each one warned about macro headwinds. SolarEdge management said during last quarter's earnings call that ocean freight costs had more than doubled, while Enphase warned that second-quarter shipments would be constrained because of the global chip shortage. Additionally, prices for raw materials including steel and copper are rising, which could further pressure margins. "Supply chain disruption remains front and center for investors near-term," JPMorgan said in a recent note to clients. Gail Nicholson, analyst at Stephens, said she expects sales and freight expenses to "remain elevated for the remainder of the year" before improving in 2022. Specifically, she believes second-quarter results will show costs coming in between 5% and 10% higher quarter over quarter. The Invesco Solar ETF, which trades under the ticker TAN , has recovered from May's low as first quarter earnings reports weighed on it, , and the fund is up about 4% over the last two months as of Monday's close. For the year, however, it's still down more than 20%, underperforming the S & P 500's gain of nearly 17%. Longer term the fund's trend is higher, and shares are up about 70% over the last year following 2020's record return. "We believe the center of attention will be on the supply chain as investors have grappled with the prospect of volatility in input costs as well as component shortages in contrast with a robust demand environment showing only minimal signs of abatement," Goldman Sachs said in a recent note to clients. Policy overhang In addition to rising costs, policy overhangs are also hitting solar stocks. A major catalyst for the group was President Joe Biden's commitment to climate-friendly policies. But so far he's faced opposition from the Senate and an infrastructure bill has yet to be passed. The initial infrastructure package outlined in March earmarked more than $600 billion for climate-related spending. It also included a provision to extend the investment tax credit , which is key for solar developers' planning prospects. This tax credit was most recently extended under President Donald Trump in December. Analysts at Cowen noted that this uncertainty coupled with price inflation could lead to a "wait and see" approach for large-scale utility solar developers. "The slowdown is more pronounced in utility scale solar vs. residential due to the pivotal effects [the investment tax credit] and tax equity financing have on them," the firm wrote in a note to clients. In other words, companies won't begin major projects until they have visibility into what the regulatory environment will look like. Companies also await clarity around U.S. policy on imports from China's Xinjiang region. In June, the Biden administration blacklisted imports from one company in the region, Hoshine Silicon. The Senate passed the Uyghur Forced Labor Prevention Act in July, which would ban imports connected to forced labor in the region. JPMorgan said that while enough non-Xinjiang polysilicon manufacturing is likely available to supply the U.S. market, there could be near-term delays or heightened costs associated with verifying component sourcing. "Volatility has picked up over the last month as investors struggle to determine if the absolute valuation levels remain too high (quite possible) and hence poised for a third post-earnings correction, or if the known headwinds are now baked-in and any sign of improvement coupled with healthy demand and improving storage economics could ignite wider interest," noted Barclays. Buy the dip? Despite uncertainty on costs and policies, Wall Street analysts generally remain bullish on the group, pointing to the long-term growth potential. JPMorgan noted that any post-earnings volatility could be a buying opportunity. According to the firm, the average multiple on alternative energy stocks is now below the one-year average. "We remain positive on the stocks under coverage heading into the print, and we remain positive on industry fundamentals from a mid-to-long-term perspective," the firm said, adding that catalysts during the second half of the year include a potential infrastructure bill, as well as the COP26 United National Climate Change Conference. Analysts led by Mark Strouse noted that supply chain disruptions vary widely by company and market, so investors need to look for company-specific stories. Strouse's top picks for the second half of the year are Sunrun and Sunnova . He pointed to the companies' above-average inventory levels which "positions each company to meet 2H21 demand regardless of supply chain or geopolitical disruption." Barclays is similarly bullish on Sunrun, and recently named the residential solar installer its top pick. The firm said Sunrun is most exposed to growing demand in California, and noted that the stock hasn't outperformed despite a "stellar" first-quarter earnings report. We believe the world is committed to cleaner energy, which should underpin healthy growth in the solar industry for the foreseeable future. analyst, Stephens Gail Nicholson On the flip side, Barclays initiated coverage of Sunnova on Tuesday with an equal-weight rating, saying despite stellar growth, the firm still expects the company's unit metrics to lag those of Sunrun. RBC also initiated coverage of Sunnova on Tuesday, except like JPMorgan, the firm is bullish on the stock and rates shares at outperform. In a note titled "all suns blazing" analysts led by Elvira Scotto said solar is "in the third inning at the latest" and noted that Sunnova is "capturing a larger portion of the market's growth." Stephens' Nicholson raised her targets and estimates across solar stocks earlier this month, including on Enphase, Sunnova, Sunrun and SolarEdge, all of which she rates at overweight. "We believe the world is committed to cleaner energy, which should underpin healthy growth in the solar industry for the foreseeable future (we continue to have a positive outlook on the sector)," she wrote in a note to clients. Despite the supply chain issues, Goldman is bullish on inverter companies ahead of the print, and holds buy ratings on both Enphase and SolarEdge. The firm expects Enphase to beat estimates and show continued strength in residential demand. Goldman also expects SolarEdge to top estimates with "clean execution on topline and gross margin." The company's new residential storage product launched during the second quarter, and the firm said it will be looking for commentary on customers' initial feedback. Earnings calendar Enphase Energy: July 27 Sunnova: July 28 First Solar: July 29 SolarEdge: August 2 SunPower: August 3 Sunrun: August 5 - CNBC's Michael Bloom contributed reporting.

A team of workers installing solar panels on a home in California.

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Solar stocks are coming off a tough first half of the year after finishing 2020 as one of the year's top trades.

As the group reports quarterly earnings, here's what Wall Street analysts say investors should be watching.