Shoals: Growing Fast With A Competitive Advantage

Summary

• Shoals is a leader in electrical balance of systems (EBOS). These are electrical connectors which can be installed faster and easier without a licensed electrician.
• This is a gamechanger as installation costs via field labor makes up approximately 29% of the cost of a solar project.
• Biden has a plan to provide 45% of US electricity from solar by 2050. Thus this firm is poised to take advantage of the growing transition towards renewable energy.

Eloi_Omella/E+ via Getty Images

The Solar Problem?

Labor shortages have been big news recently as the need for skilled talent is an issue for many firms. According to the Bureau of Labor Statistics, employment of electricians is forecasted to increase faster than average, with an extra 74,100 electrician jobs forecasted from 2018 to 2028, which is an increase of roughly 10%. In addition, the average electrician salary in places such as New York, the highest-paying state, has increased by a massive 10.3% over the last five years from 2013 to 2018.

Solar Installation Cost (Investor Presentation)

Meanwhile, Biden has a plan to provide 45% of US electricity from solar by 2050.While, installation cost via field labor makes up approximately 29% of the cost of a Solar Project. With all these macroeconomic constraints and tailwinds, this leaves an opportunity for solutions.

The Solar Solution?

Shoals (NASDAQ:SHLS) is a leading provider of electrical balance of systems (EBOS) solutions for solar energy projects. These include cable assemblies, junction boxes and monitoring systems. The beauty with Shoals products is they are fast, easy to install and don't require a licensed electrician. This is a game changer and according to the company results in a 43% lower installation cost and 23% lower overall material cost. The firm has basically created a “better mousetrap” for electrical installation. In addition, at least one of their parts are used on approximately 50% of all U.S. solar capacity currently installed in 2021. However, it should be noted that the firm's solution does have a higher cost per unit but the reliability benefits make this more cost effective long term. With Biden’s bold plans to run 45% of the US from solar by 2050, this firms plan to capture this largest addressable in both solar and EV charging stations.

Shoals (Investor presentation)

Competitive Advantage?

The firm has a competitive moat which consists of 17 US patents (2 patent pending) and a proprietary manufacturing process.

Patents (Investor presentation)

Sunny Financials

Shoals released their full year results for 2021 and with revenue and gross profit growing by 21% and 24%, respectively, and their gross margin increasing to 38.8%. Their adjusted EBITDA only rose modestly as the firm invested into their new EV charging business unit & product development.

Shoals Margins (Created by author Motivation 2 Invest)

Shoals is expected revenue growth to accelerate in 2022, with guidance of between $300 million and $350 million for year, up by over 40%. Due to their consultative approach to business, the firm's predictions seem quite reliable.

Shoals Revenue (Created by author)

Is the Stock Overvalued?

As a growth stock trading at a price to sales of 16 and a PE ratio of 45 you may think the firm is ridiculously overvalued. The market cap is $3.56 billion on $213 million in sales. However, as this company's business model is based upon future industry growth, let's dive into my discounted cash flow model to see the fair value intrinsically.

Shoals stock valuation (Created by author at Motivation 2 Invest)

I have estimated 42% revenue growth for next year, in line with the company's guidance and 35% revenue growth for the next 2 to 5 years. I have also estimated margins to expand to 27% which is the average for the green energy industry in 5 years.

Shoals Valuation (Created by author)

Given these projections I get a fair value of $18/share and the stock is currently trading at $21/share, thus is overvalued by approximately 12%.

Risks

Insider Selling

Insiders own 5.7% of the firm which is good news, however I did notice the CFO Philip Garton has sold $2.6 million worth of his shares, which is a substantial stake given a $1.39 million per year salary. This is a worrying sign as nobody knows the financials better than him, thus he may believe the stock is overvalued, at the $26 share he was selling it at.

Competition

Despite the Solar Industry having lots of tailwinds behind it, the market is vastly competitive. Companies such as Canadian Solar (CSIQ) have strong manufacturing in China and are taking a leveraged approach to growth. Whereas First Solar (FSLR) is vertically integrated and thus has strong margins.

Bullish Growth Rates

The valuation is based upon revenue growth of 42% next year and 32% for the next 2 to 5 years. Based on the firm's guidance, however, this may not come to fruition in future years and thus that should be taken into account; this is a growth stock.

Rising Interest Rates

At the macro level, high inflation and a rising interest rate environment has suppressed the valuations of growth stocks. As growth stocks have their valuation weighted towards future cash flows. Higher interest rates mean higher discount rates which decrease the value of these cash flows.

Final Thoughts

Shoals is a fantastic company which has created a better, faster solution for electrical installations. There are a lot of industry tailwinds, such as the rising cost of licensed electricians and the high solar energy investment which should help this firm to continually grow. However, even despite the decline in price, the stock is still “priced for perfection” and based on the “if come” rather than the “as is”. The CFO confirmed this issue with insider selling. This growth stock has long term potential, but the valuation is still a little spicy.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This is not a recommendation to buy or sell any stock, or financial advice.