As if investors weren't charged up enough about renewable energy stocks over the past year, clean energy businesses are once again garnering attention since President Biden recently unveiled his $2 trillion infrastructure plan -- a plan that emphasizes updating the power grid and adopting renewable energy solutions. Among other things, the American Jobs Plan includes a 10-year extension and phase down of the investment tax credit.
While investors recognize that Biden's infrastructure plan represents a potential tailwind for solar stocks, choosing the best sun-centric stock can be overwhelming, and plenty of solar stocks have burned investors over the years. Fortunately for them, Enphase Energy (ENPH 5.64%) is a solar stock that they can warm up to.
Take a gander at how much green this company generates
It's no wonder why Enphase delighted shareholders when it announced Q4 2020 earnings -- the company reported diluted EPS of $0.50, while analysts had expected the company to report only $0.40 per share. But it's not the profit that I found so impressive -- it's the cash flow.
In the last quarter of 2020, Enphase reported $84 million in cash from operating activities. Take into account the first three quarters of the year, and Enphase generated $216.3 million in operating cash flow for 2020, approximately 28% of the $774.4 million that it booked on the top line. To put this in perspective, let's take a look how SolarEdge Technologies (SEDG 5.33%), one of Enphase's leading competitors, fared. In 2020, SolarEdge reported sales of about $1.5 billion -- nearly twice that of Enphase -- but operating cash flow of only $223 million, or 15% of revenue.
Take into account Enphase's free cash flow and the picture looks even better. In 2020, Enphase generated a company record, $198.9 million in free cash flow, representing 26% of its overall sales -- a steady improvement over the 4% and 20% that it had in 2018 and 2019, respectively, according to Morningstar. How did SolarEdge do in terms of free cash flow as a percentage of sales last year? In 2020, SolarEdge's free cash flow accounted for about 7% of sales, representing a steady decline from the 16% and 14% that it reported in 2018 and 2019, respectively.
Another way the financials sparkle
Besides the impressive cash flow generation, the company's strong balance sheet signals that the company is in sound financial health. Enphase ended 2020 with $330 million in total debt -- but take into account the company's $679 million in cash and cash equivalents, and you'll find the company ended 2020 with a net cash position of $349 million, an extremely advantageous position considering the turmoil that the global pandemic is wreaking on so many other companies.
Besides providing some reassurance that the company is on solid financial footing, the strong balance sheet affords the company the ability to seek growth through acquisitions without having to rely too heavily on debt. Enphase recently completed two acquisitions, Sofdesk and DIN Engineering -- two deals Enphase says "are expected to enhance the capabilities of [its] digital platform, enabling [its] installers to simplify the sales process and improve the buying experience for homeowners."
Apparently additional acquisitions are on the company's radar as well. During the Q4 2020 conference call, Eric Branderiz stated that the company's "acquisition approach is going to be very active. We have a lot of things that we need to complement our digital platform," adding that other executive management team members "are working around the clock with a pipeline, very healthy pipeline of the M&A, acquisitions."
Don't let the price tag blind you
A cursory glance at the stock's valuation may leave some investors believing that shares are too hot to handle. Changing hands at about 106 times operating cash flow, Enphase's stock is trading at a premium to its five-year average ratio of 75. However, when juxtaposed with that of its leading competitor, SolarEdge, Enphase's valuation seems much more reasonable. Shares of SolarEdge are trading at 68 times operating cash flow -- more than three times their five-year average ratio of 21.
Now's the time to invest in Enphase
While the S&P 500 has risen 7% so far in 2021, shares of Enphase have languished under gray skies and fallen 7%. But to dismiss Enphase because of its recent underperformance would be extremely short-sighted, as the company's future remains bright. As one of the more promising growth stocks on the green energy landscape, investors would be wise to warm up to Enphase while shares can be found in the bargain bin.