Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Shares of SolarEdge (NASDAQ:SEDG) are on a tear.
On Monday after close of trading, the maker of solar inverters reported stellar fiscal Q2 2019 earnings, sparking a series of price target revisions for the stock, and one big upgrade as well. Here's what you need to know.
Heading into Q2, analysts expected to see SolarEdge report adjusted profits of $0.60 per share on sales of $266.4 million, according to details provided by TheFly.com. (Other analysts forecast slightly different numbers -- $0.62 per share with sales of $265 million, for example.)
Whichever estimates you believe, however, SolarEdge exceeded them all. Reporting earnings of $0.64 per share pro forma and $271.9 million in sales (actual GAAP profits were $0.39 per share, up 47% year over year), the company delivered an earnings beat -- and then proceeded to promise to beat estimates once again.
According to SolarEdge's latest guidance, it expects to deliver sales of $310 million to $320 million in Q3. (Wall Street is only looking for $282 million.) And amazingly, it says it's going to do this in a relatively flat market for solar products this year.
How Wall Street reacted
It almost goes without saying that this caught Wall Street solar analysts by surprise. But it was a pleasant surprise.
JMP Securities, for example, called SolarEdge's results "a financial report and business outlook ... far above our own expectations." Admitting that it knew SolarEdge had been taking share from European competitors, JMP says it still managed to underestimate just how much additional revenue the company could pull in from those share gains.
JMP is particularly impressed with SolarEdge's core solar inverter business. Heading into Monday's earnings, StreetInsider.com (subscription required) says JMP was worried about European "string inverter businesses" and other competitors threatening SolarEdge's leading position in the inverter market. However, it turns out that these rivals, including Germany's SMA and China's Huawei, "continue to be unable to respond competitively to SolarEdge." Despite the competition, SolarEdge "continues to scale its offerings and becomes more competitive in commercial-scale systems," racking up market share and "effectively sidelin[ing]" its rivals.
Shocked into admitting that SolarEdge is a stronger business than it had believed, JMP upgraded the shares to outperform yesterday and assigned a $60 price target.
Mimicking JMP's move, analysts at Cowen, JPMorgan, and UBS -- all of which already had outperform ratings on the stock -- raised their price targets to $65, $63, and $65, respectively. Cowen declared the "recent bear thesis" against SolarEdge to be "refuted." JPMorgan predicted that we will see strong solar power growth in Europe through the first half of this year, and in the U.S. in the second half.
Bracketing these $60-ish predictions, Roth Capital raised its target to $70 (on the high side), while even skeptical Credit Suisse raised its target to $49 (on the low side), grumbling in the process that it needs to know more about capex spending before it can go higher. Roth Capital, however, predicted that given "strong" demand for solar energy, SolarEdge's shipment volumes and profit margins are both likely to improve over the next year.
The upshot for investors
With profits up 47% in Q2, SolarEdge has now earned $112 million in profit over the last 12 months. Free cash flow at the company is even better -- $144 million. Whichever number you prefer to value the company on, SolarEdge stock looks bargain priced for its projected 22% annualized earnings growth rate over the next five years -- 23 times earnings, or less than 18 times free cash flow, and with a $290 million cash hoard (net of debt) that makes the stock's equity even cheaper than it looks.
I have to agree with Wall Street on this one: SolarEdge stock is a buy.