After going on a tear over the past six to nine months, there aren't a lot of renewable energy stocks that investors would consider a bargain. Expectations for growth have gone through the roof, price-to-earnings (and revenue) multiples have gone up, and even yields for renewable energy power plant owners have plummeted.
As we scour the market for opportunities, three of our Foolish renewable energy contributors found some bargains, and Canadian Solar (CSIQ +2.11%), Atlantica Sustainable Infrastructure (AY +0.00%), and First Solar (FSLR 0.75%) lead the list.
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The manufacturing leader
Travis Hoium (Canadian Solar): Solar energy installations have grown from 18 gigawatts (GW) in 2010 to 141 GW in 2020, according to a report from Bloomberg New Energy Finance. And over the next three years, installations are expected to grow to 210 GW. Canadian Solar is one of the biggest manufacturers of the solar panels being installed and it now provides over 10% of all solar panels in the world.
Manufacturing solar panels has been a tough business for over a decade, but right now we're seeing a few companies with scale build businesses that can be profitable. Canadian Solar is one of those companies.
CSIQ Revenue (TTM) data by YCharts
Margins and net income can be choppy depending on demand and raw material costs, which has hurt margins the last two quarters, but Canadian Solar now has the scale and market share to be profitable long-term. And for investors looking for a bargain, shares trade for just 18 times earnings with the potential for that ratio to come down if margins improve as expected in 2021. This could be a true steal in the solar industry.
Playing in the right sector
Howard Smith (Atlantica Sustainable Infrastructure): Investors looking for bargains would do well to find a quality business that comes with a growth-driving catalyst. Atlantica Sustainable Infrastructure participates in the growing area of renewable power generation. It also owns efficient natural-gas-fired generation capacity, electric transmission lines, and water desalination plants.
Its assets are global, allowing it participate in the international desire to expand renewable energy infrastructure. That catalyst alone makes it a company worth looking into for investors. And with one of its core geographies being North America, another potential catalyst is an American infrastructure bill that is designed in large part to aid the growth in clean energy projects.
Almost 75% of Atlantica's revenue came from its renewables sector in 2020. The company made about $300 million in equity investments in 2020, but in the first quarter of 2021, it already had agreed to $280 million in new investments, including the third largest geothermal plant in the U.S.
The company estimates it will make $300 million in new equity investments at least through 2023. A growing percentage is expected to come from a pipeline of new projects in renewables. The company says it expects 2021 growth of cash available for distribution (CAFD) to be 14.5%, based on the midpoint of its guidance range. Some of that cash goes into growing dividends for shareholders. Over the past three years, Atlantica has increased dividends by more than 30%.
AY Dividend data by YCharts
Though growth of CAFD is expected to pare down to high single digits annually beyond this year, it's a level that should give investors comfort in continued dividend increases. The company also trades at a discount to its peers. Its price to free cash flow is around nine, while Brookfield Renewable Partners and NextEra Energy Partners both trade around 15 on that metric.
For investors looking for a bargain in the renewable energy sector, Atlantica Sustainable Infrastructure looks to be a good pick right now.
A leader in solar with some nice advantages
Jason Hall (First Solar): In general, I'm a bigger fan of investing in renewable energy producers to find the best risk-adjusted opportunities for investors. That means choosing companies like the one Howard writes about, while often avoiding the companies that make the equipment, which can get squeezed pretty hard when the economic cycles that drive demand shift from growth to contraction. And that's made it much harder to find winners in the manufacturing space.
But in recent years, a combination of consolidation and the bigger trend of accelerated utility-scale adoption of solar has helped smooth out some of that volatility, and the leaders are better positioned to continue to lead. That makes First Solar, one of the few solar panel makers that I like as an investment, particularly interesting. And for a few reasons in addition to the trends above.
First, the company's management has always prioritized a very strong balance sheet. Through its most recent reported quarter, First Solar carried over $1.7 billion in cash and investments, versus less than $300 million in debt. This has allowed the company to continue investing in capacity and improving its technology across the market's cycles, something that many of its less-well-capitalized peers have struggled to do. Second, the company's thin-film technology -- in particular its most recent iteration -- offers a number of compelling benefits that continue to make it attractive for utility-scale projects, which drive the bulk of global solar deployments.
The results seem to be evident in First Solar's gross margin, which is back on the rise and surpassed 25% last year, the highest in more than five years. And that makes the recent valuation of about 24 times sales reasonable, especially considering that global solar deployments are expected to double over the next five years.
Big bargains in renewable energy
Each of these companies is a bargain in its own right. And with the growth of renewable energy around the world providing tailwinds for the entire industry, all three could be great stocks for investors to hold long-term.
