The Bottom Fishing Club - Array Technologies: Solar Industry Turnaround Possible After Election

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Array Technologies is undervalued due to fears of potential tax-policy changes for the solar industry if Republicans sweep the 2024 election, alongside overly aggressive short-selling efforts.U.S. ...

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Several years of straight down in share pricing has washed out the majority of weak-hand holders. I have recently mentioned the upside potential in EV battery-related names like Lithium Americas (LAC) here and Albemarle (ALB) here. For me, the strongest outlooks in the solar market revolve around the construction of solar farms for utilities and big businesses. A projected massive uptick in electricity demand expected from electric vehicles [EVs] and now artificial intelligence [AI] datacenters is nothing to sneeze at. My favorite risk-adjusted idea in solar remains First Solar (FSLR), basically the largest photovoltaic [PV] panel maker in America, with other manufacturing operations in Southeast Asia (outside of China) and soon India. My estimate is this $195 stock has been held back in price by at least $50 during the second half of 2024 from fears Donald Trump and the MAGA party are set to win November's important election. The argument is they could decide to eliminate the government subsidies supporting First Solar's rapidly rising profitability. Another solar farm name being held back is Array Technologies, Inc. (NASDAQ:ARRY). Array manufactures the base stands to install solar panels, with a specialty of offering gears and motors to rotate the panels (track) toward the sun as it moves across the sky daily, all controlled with software. This design allows for greater electricity generation (efficiency), beyond the added install/maintenance cost of Array's products. Array Tech - Q2 2024 Earnings Presentation - New Product Slide The positive news for shareholders is an industry downturn and the pushed-back timing of several utility-scale solar builds has not created operating losses for the business, like many other solar names focused on home rooftop consumer demand. Yes, sales have been hit in 2024, and the stock quote has been decimated, but any upturn in business should allow both to recover quickly. You can see on the table below, how analyst estimates for sales and earnings (even with experts in the industry being overly bearish on future growth in my view) are now projected to rebound strongly starting in 2025. Seeking Alpha Table - Array Tech, Analyst Estimates for 2024-26, Made October 23rd, 2024 Argument to Own Solar Stocks The whole solar industry was hit by a cyclical and sentiment peak early in 2021 after Democrats swept to power on the 2020 election result. Then, new downside was exacerbated by oil/gas fossil fuels topping during early 2022, the leading driver of alternative-energy, solar demand logic. On top of a rotten trend for green energy sales by most firms, 2024 has witnessed an extra level of fear about solar's future, if Donald Trump and the Republicans storm back into a power in this year's November election. The thinking goes - a major repeal of U.S. government tax incentives for solar would decimate consumer and business demand trends for new projects in this country. And, while I don't disagree with this rationale for avoiding or selling solar names in portfolios, climate change is accelerating (with hotter weather conditions in America and crazier freak storms everywhere). So, it will be difficult to avoid the pull of cleaner, renewable energy sources over time. We have to remember EVs are getting cheaper and more prolific in our economy, while AI datacenter construction is expanding rapidly. As a consequence, we will need lots of new electricity generation in future years. Already, new capacity for electricity additions is about 50% dependent on solar builds in China, Europe and North America. And, the IEA's 2024 Renewables forecast is calling for solar installations to be the primary driver of clean energy growth into 2030. IEA - 2024 Renewables OutlookIEA - 2024 Renewables Outlook Then, if the ongoing trouble/conflict in the Middle East leads to supply shortfalls of crude oil from this region (producing 25% to 30% of all global fossil fuels), any spike in prices for liquid burnable energy sources will only serve to \"accelerate\" EV demand given an improving spread for mileage cost economics (without any help from government incentives) vs. traditional ICE vehicles. What I am saying is the demand growth rate for renewable electricity supply worldwide, derived from solar, may not slow much on a long-term chart. In the U.S., the EIA reports only about 4% of total electricity generation came from solar vs. 60% from natural gas in 2023. So, the market opportunity remains quite large, especially if natural gas prices were to rise dramatically from 2024's inflation-adjusted all-time low (which I believe is inevitable). EIA Data - U.S. Electricity Generation Sources, Since 1950EIA Data - U.S. Electricity Generation Sources, Since 1950 On top of this bullish long-term setup for companies like Array, what if the markets are surprised by a Democratic Party win in several weeks? What if Kamala Harris is elected Presidency, while Congressional purse-string control is also given to those willing to invest extra taxpayer dollars into solar construction? With nearly every poll indicating a dead heat for voter intentions (including national and swing-state polling within the statistical margin of error in October), it's not a far-fetched, completely unlikely proposition that Democrats sweep. In fact, this outcome may have the same odds as Republicans sweeping. Conversely, if we end up with divided government (executive vs. legislative branches) from the major political parties (perhaps the greatest probability outcome), little change for government green energy incentives may be our final destination. Assuming either divided government or a Democratic win is our future in coming weeks, beaten up and inexpensive solar equities could be set to soar on a reversal of conventional wisdom views regarding the industry's immediate fortunes. For Array specifically, 2024 has been a horrible year for operations, with a decline in revenue of -40% expected. A number of one-time problems have compounded a slowdown in utility-scale installations by customers. So, an unexpected return to high levels of solar farm demand on a Democratic sweep could ignite a real turnaround in the stock quote sooner rather than later. Array Tech - Q2 2024 Earnings Presentation - Operating Issues Bottoming Chart Pattern? The trading pattern over the past 12 months is absolutely ugly. I have not suggested the company as a buy proposition all the way down until today. As of yet, there are no clear gotcha buy signals in my work, from a technical momentum perspective. Yet, hints that a bottom is forming can be found. Really, the wicked declines in the 20-day Chaikin Money Flow and 13-day Force Index have reversed into green/positive territory over in the middle of October. Both are telling us aggressive selling may have ended in early September. Plus, a flatlining 14-day Ease of Movement reading is telegraphing a much better supply/demand balance over the latest eight weeks of trading action. Considering the high-volume share turnover since August, it looks like many existing investors have been giving up on Array, selling to new investors hunting for value and turnaround potential. StockCharts.com - Array Tech, 12 Months of Daily Price & Volume Changes Short interest has been building since the company began public trading in late 2020. Over the past year, the percent of outstanding shares short has doubled to 21.4% (quite elevated vs. the typical U.S. equity well under 5%). The hiccup in operating results and grinding belief that Republicans will win the 2024 election have encouraged short sellers to keep at it. One bullish point I want to make is this short position as risen from 14% to 21% since Array's last earnings report, despite a nearly flat stock price. What this could be telling us is short sellers are having a tough time holding price down. If any good news is reported by the company (or Democrats win the election), a rapid short squeeze rally could be approaching. YCharts - Array Tech, Share Price vs. Short Interest, Since 2020 IPO Final Thoughts Based in New Mexico, most of the company's manufacturing is done in the U.S. (60% of worldwide capacity). It is another investment selection in the solar industry, running a majority of its production and sales inside America, just like First Solar. For those desiring supply chains not centered around China, Array is an excellent risk-adjusted choice. Array Tech - Q2 2024 Earnings Presentation - Business Accomplishments Only minor insider and management share selling has occurred over the last 12 months, with almost no trades listed by the SEC over the previous three months. So, it's safe to say those running the company are nowhere near as worried about Array's future as short sellers. The company is a secondary player in size to competitor Nextracker (NXT). Nextracker is selling for about 10x forward EPS, with a more limited growth profile. Its shares are also down about -50% in 2024. Unfortunately, NXT has a slower growth profile, according to analysts. One of the things I like best about Array is it runs a solid, relatively conservative balance sheet, with $848 million in current assets like cash and inventory held at the end of June. This stacks up well against $680 million in financial debt and $1.07 billion in total liabilities. Even with the 2024 downturn in business, management has been able to create $200+ million in free cash flow over the latest 12 months of operation. I am confident $100 to $200 million in annual FCF will be the future, matched against a total equity capitalization today of $940 million at $6.20 per share. And, if business booms in several years, yearly FCF above $200 million is likely by 2026-27. This is my bottom-line conclusion: where else can you find a legitimate growth-stock selling for 5x FCF and around 6x EPS by 2026? I cannot locate many in my extensive research efforts. In addition, we're talking about a 30% to 40% discount valuation on the equivalent ratios to closest industry-peer Nextracker. YCharts - Array Tech vs. Solar Peers, P/E on Forward 1-Year Estimates, 12 Months Risk vs. Reward Ideas Could Array sell below $5 a share, before a rebound emerges? Sure, especially if Republicans do sweep into power in several months. Wall Street sentiment would turn quite negative over the short term on all solar picks, while a recovery phase for the business could turn into a drawn-out affair. Competition from Nextracker or any new entrants could keep sales unchanged and profits missing in action. Given this future, I would not expect the share quote to break above $10 for years, if ever again. However, if a government power split by the major parties or a clear Democratic win emerges in November, I am confident Array will trade above $10, perhaps by early next year. A brighter future, with rising sales and profitability on accelerated solar farm demand could possibly create a $12-15 price by the end of 2025, good for a +100% return on your investment in the low-$6 zone. If you put valuation metrics similar to Nextracker on vastly improved Array results, it will be very easy to get there. I rate Array Technologies a Buy, and own a small position. If you are a buy-and-hold investor wanting increased exposure to the solar sector, now may be the time to pull the trigger. A surprising election result could be the catalyst for a rapid turnaround in the share quote.  Thanks for reading. Please consider this article a first step in your due diligence process. 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