As climate change concerns aggravate, the next few decades belong to renewable energy stocks. According to BP (NYSE:BP), the share of renewables in primary energy is expected to increase from 5% in fiscal year 2018 to 45% by FY2050.
BP also believes that the growth in renewables will be dominated by wind and solar power. With a multi-decade industry tailwind, it’s important to hold some renewable energy stocks in the portfolio.
With renewables at an inflection point, there are several companies there are positioned to deliver strong earnings growth. In particular, solar energy is likely to be in the limelight. Estimates suggest that solar PV and thermal is likely to account for 17% of the world’s primary energy source by FY2050.
A report from Wood Mackenzie also suggests that solar power is likely to be the lowest-cost power resource in the U.S. by 2030. The cost advantage due to technological advancement is another reason to be bullish on solar energy stocks, relative to other renewable energy stocks.
Let’s talk about three renewable energy stocks that are positioned for strong earnings growth over the next five years. Given the factors discussed, my focus is on solar energy stocks.
Renewable Energy Stocks: Enphase Energy (ENPH)
ENPH stock is attractive among renewable energy stocks and worth considering in the current correction. As an overview, Enphase Energy is a microinverter company with a presence in residential solar, residential storage and commercial solar. The company is also expanding its presence in off-grid solar and storage.
Enphase Energy stock touched a high of $229 at the beginning of the year. The stock is already down more than 30% on the year. With the markets in correction mode, gradual accumulation can be considered.
According to analyst estimates, Enphase Energy’s annual earnings growth is likely at 38% in the next five years. The stock does trade at a price-to-earnings ratio of 88.6. However, considering the growth outlook, ENPH stock is likely to have support around $150. It trades today near $160.
In the residential solar segment, the company has a strong presence in North America. However, Europe and Japan are likely to be other big markets in the next few years. Enphase Energy’s international revenue has been increasing on a sequential basis and is a key earnings growth catalyst.
It’s worth noting that Enphase is free cash flow positive. This gives ample flexibility for organic and inorganic growth. Recently, the company completed the acquisition of Sofdesk, which is a provider of design software for residential solar installers and roofing companies.
Overall, Enphase Energy is positioned for sustained growth in residential solar. In addition, the company’s commercial solar business is likely to get bigger in the coming years. With a global push towards renewables, ENPH stock is worth holding for the next few years.
Canadian Solar (CSIQ)
CSIQ stock has also been in correction mode after a big rally. From highs above $67, the stock has corrected to a little more than $43. I believe that CSIQ stock is undervalued at current levels.
To put things into perspective, the company’s earnings are likely to grow at an annual rate of 32% over the next five years. The stock trades at a P/E of 21.7. Therefore, at a price-earnings-to-growth ratio of less than one, CSIQ stock is worth buying at current levels.
Strong earnings growth seems likely considering the module shipment guidance. For FY2020, the company expects module shipments at 11.2GW to 11.3GW. For the current year, module shipments are likely to be in the range of 18.0 to 20.0 GW.
Clearly, the company is positioned for strong growth. With a global presence, the backlog addition is likely to remain strong.
From a financial perspective, the company’s leverage (net-debt-to-EBITDA) was 2.3 for the third quarter of 2020. However, leverage is not a concern considering the fact that the company’s EBITDA-interest-coverage was 7.7 for the same period.
Therefore, Canadian Solar has robust financial flexibility and a growing backlog. With positive industry tailwinds, CSIQ stock is attractive at current levels.
Renewable Energy Stocks: SolarEdge Technologies (SEDG)
For a while, SEDG stock has been trading sideways to lower. However, over a one-year period, the stock is still higher by 114%. SEDG stock is another name among renewable energy stocks that’s worth considering at current levels.
A key reason to be bullish on the stock is the company’s potential earnings growth in the coming years. SolarEdge identifies itself as a leading solar inverter company with a presence in 28 countries.
The company has a complete array of residential and commercial solar solutions. Over the next few years, SolarEdge expects the commercial and utility segments to be the key growth drivers.
An important point to note is that with an advanced PV system, SolarEdge has been successful in increasing the average revenue per installation (ARPI). As shipment volumes continue to grow, I expect improvement in its EBITDA margin as well.
Another potential growth driver for the company is the e-mobility division. The company has already been selected as a supplier of electric powertrain units and batteries for Fiat E-Ducato.
SolarEdge has delivered strong top-line growth in the last five years along with positive operating cash flows. The company has the strong financial flexibility to pursue aggressive growth.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored more than 1,500 stock-specific articles with a focus on the technology, energy and commodities sector.
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