Goldman Sachs says there could be 'multiple beats' by solar companies and gives its favorites

Published Wed, Apr 19 202310:30 AM EDT

Multiple residential solar stocks should be in a position to outperform Wall Street's expectations this earnings season, according to Goldman Sachs. Analyst Brian Lee pointed to SolarEdge , Sunrun and Enphase as residential solar names to watch this earnings season given near-term tailwinds that can give a boost to earnings. He said levered utility stocks in the solar space, on the other hand, will likely not have the same support this quarter. "Heading into 1Q23 earnings season, we expect investor focus to shift to micro vs. macro themes as near-term fundamental trends in [residential] solar appear to be stronger than previously expected and could drive multiple beats/guidance raises across the group, in our view, while utility-scale levered names may have less near-term upside," Lee said in a Tuesday note to clients. Solar stocks have modestly underperformed the broader market so far this year. The Invesco Solar ETF (TAN) has gained 7.5% year to date, while the S & P 500 added 8.2% in the same time period. TAN .SPX YTD mountain The Invesco ETF and S & P 500 Lee said there will be less of a catalyst path this quarter from the Inflation Reduction Act. That's because the Treasury disclosure around domestic content and manufacturing credits is not expected to be released until later in the year, he noted. Weakness in demand in the South could be offset by strength in California and the Northeast in the first quarter, Lee said. He also noted that the price of polysilicon, a form of silicon used as a raw material, declined in the quarter. To be sure, he warned that the residential beats could be short lived, especially for Sunrun and Enphase amid concerns around growth in the second half of the year. SolarEdge is more likely to sustain outperformance, he said. He has buy ratings on the three residential solar stocks. Here's how he expects each of them to do when reporting first quarter earnings: Enphase Enphase should beat on both sales and per-share earnings, Lee said. He said sales should come in at $737 million, while earnings per share are expected to total $1.34. By comparisons, analysts polled by FactSet expect $715 million in sales and $1.21 in per-share earnings. Lee said investor focus will be on storage shipments and he is modeling a 10% decline that's in line with the company's guidance. He said to expect second-quarter earnings at $1.39 per share and revenue at $765 million. That would place the company above Wall Street's consensus, with analysts expecting $1.28 per share and $754 million in revenue. Enphase shares have fallen 14% this year. Nearly four out of every five analysts agree with Lee and rate the stock a buy, according to Refinitiv, with the average price target implying an upside of 27.2%. SolarEdge Lee said the company should see a first-quarter, non-GAAP earnings per share of $2.19, higher than the FactSet consensus of $1.94. Sales should also come in ahead of expectations at $939 million versus the $930 million estimate. He also said revenue should come in near the high end of expectations. Looking ahead, Lee forecasts revenue to come in slightly below the consensus estimate of $987 million at $981 million for the second quarter. Non-GAAP per-share earnings, meanwhile, should come in at $2.33, above the $2.12 anticipated He said the company should raise guidance above expectations as investors focus on trends in the European and U.S. residential businesses. "We believe SEDG is set up for another beat and raise on the back of continued volume strength in Europe, where the company is also benefiting from a margin rebound on the back of better pricing and euro FX trends," he said. "At the same time, the US business appears to be more stable in the beginning of the year given ongoing demand pull-forward in CA, though this is less of a tailwind to SEDG vs. peers given its diversified geographic sales mix." Shares have added 11.7% this year. And analysts expect further upside ahead, with the average price target showing the stock could rise another 16.6% in the next year, according to Refinitiv. Nearly three out of every four analysts rate the stock a buy. Sunrun Sunrun should have a tougher quarter to report, according to Lee. Lee said to expect first-quarter revenue at $493 million, under the consensus estimate of $522 million. And he expects the company to post a larger per-share earnings loss than expected, with his estimate of 22 cents per share lost 9 cents bigger than FactSet's estimate of 13 cents per share in the red. Investors will focus on the company's financial abilities and backlog, he said. And Lee said near-term demand should be better than expected. While not offering specific forward-looking estimates, Lee said that he will be watching for commentary on the "quarterly cadence of customer margins and if there may be more pressure in 2H23 assuming a pull back in installation growth." He also said easing trends in pricing could help margins expand throughout the year. The stock has dropped 15.5% this year, but the average analyst polled by Refinitiv expects shares to rally 85.1% in the next year. About three out of every four analysts hold buy ratings on the stock. — CNBC's Michael Bloom contributed to this report.