The renewable energy industry has been hot over the past year as more favorable policies have begun taking shape in Washington, D.C., and even the most old-school energy companies are making efforts to transition more of their power generation to renewable sources. And that has driven up the prices of many renewable energy stocks.
As a result, good values among stocks in that arena can be hard to find, but three of our Foolish contributors see First Solar (NASDAQ:FSLR), Proterra (NASDAQ:PTRA), and Vestas Wind Systems (OTC:VWDRY) as great opportunities for investors looking for bargains in the renewables space. And there's something in this group for everyone.
The solar leader
Travis Hoium (First Solar): Cheap is always a relative term, but in the case of solar manufacturing and equipment, I don't see any stock cheaper than First Solar. The company has among the industry's best margins, has been profitable long term, and has $1.8 billion in cash on its balance sheet. Consider how its profit margin and debt (or in First Solar's case, net cash) compare to those of Canadian Solar and SunPower, two of its leading competitors.
First Solar's advantage in the market is that it makes a thin-film solar product that has proven to be lower cost than the products of its competitors. It also has more manufacturing capacity in the U.S. than any other company in its niche, which helps it avoid tariffs. Also, it isn't reliant on polysilicon, a raw material in traditional solar cells that has spiked in price in 2021.
Add it up and you have a very profitable solar business. Management expects earnings per share this year in the $4.05 to $4.75 range, and recently announced a $680 million investment in new capacity that should keep its earnings growing. Shares currently trade for 20.6 times the midpoint of 2021's forecast earnings range, a reasonable multiple for a growing energy company -- and that's before accounting for the cash on the balance sheet. I think First Solar is both a good value and has opportunities to grow or return cash to shareholders, both of which would be good for the stock price.
A potential bargain
Howard Smith (Proterra): Defining a stock as cheap has to be put in the proper perspective. By most standards, speculative investments don't have discounted valuations. They can be shots in the dark, with values that won't be clear until the companies have years of additional development and (hopefully) business success under their belts.
But even so, electric battery and bus electrification specialist Proterra is one company that speculative investors may want to put on their radar.
Proterra just went public through a SPAC merger in June with ArcLight Clean Transition, but we can still look at the prior financial data that it has provided. Some newly public electric vehicle (EV) companies are having trouble living up to the projections they made prior to going public. So regardless of management's credibility, it's prudent to focus on current financials and only a few future projections.
The company had revenue of almost $200 million in 2020. For Q1 2021, it reported $54 million in total revenue. This was derived from delivering 48 vehicles and 26 battery systems. Proterra's original equipment manufacturer (OEM) partners include Thomas Built Buses and Freightliner, both subsidiaries of Daimler (OTC:DMLR.Y). Proterra announced this week that it is partnering with Miami-Dade County in Florida for a fleet electrification project; the county will be acquiring 42 Proterra ZX5+ electric transit buses, and plans to install 75 Proterra chargers in three bus depots.
The recently announced bipartisan infrastructure package now under discussion in Congress includes $15 billion for EV infrastructure and electric buses and transit. Those investments aren't guaranteed to be part of the final version of this infrastructure legislation, but Proterra should still benefit from a Biden administration that favors a wider shift to electric vehicles. Secretary of Energy Jennifer Granholm was a member of Proterra's board of directors before she resigned ahead of taking up that cabinet position.
Like many young EV companies, however, Proterra is valued at a large premium based on its potential. It has a market cap of about $3.5 billion, but including warrants issued upon the close of the SPAC merger, that figure would be closer to $4 billion. That represents a price-to-sales ratio of 20 based on 2020 revenue, including the warrants. The company believes it could have sales of over $2 billion in 2025. But even ignoring that ambitious projection, a mere doubling of its sales would result in a reasonable valuation at recent prices, especially if the company, and the sector, continue to grow. That makes Proterra a possible bargain for a speculative holding.
A rare chance to "buy the dip" in the world's leading wind energy company
Daniel Foelber (Vestas Wind Systems): Investors interested in the wind energy sector will likely find picking stocks in it to be challenging. Unlike solar, which has its fair share of U.S.-based technology companies, parts and panel suppliers, and components manufacturers, many leading wind energy companies are based in Europe. As such, Americans may be less familiar with these businesses, and have trouble purchasing their shares on a U.S. exchange like the NYSE or Nasdaq.
A good way of discovering leading wind stocks is by looking at the holdings of the First Trust Global Wind Energy ETF (NYSEMKT:FAN). Its biggest holding, Vestas Wind Systems, is the largest wind machinery and technology manufacturer, operator, and service provider in the world. In 2020, it controlled one-third of global onshore wind energy installation capacity (excluding China). Vestas also has an American Depositary Receipt that lets U.S. buyers purchase the equivalent of Vestas shares without exchanging dollars for euros.
Vestas is currently trading around a six-month low, which could be a buying opportunity. One reason for the stock's decline could be that the company's revenue fell by 12% year over year in Q1 2021, and its EBIT margin went negative, partly due to higher sales, general, and administrative expenses. However, Vestas is guiding for 2021 revenue in the range of 16 billion euros to 17 billion euros, which would amount to growth in the 8% to 15% range, and set a record high.
Vestas also has an extremely strong balance sheet, with more cash than debt and a net-debt-to-EBITDA ratio of negative 0.3. Like other renewable energy stocks, Vestas is struggling in a business environment that is thick with competition, high earnings expectations, valuation concerns, and rising interest rates -- not to mention that the oil and natural gas sector is doing quite well this year compared to last. The short-term narrative has changed, but clean energy remains the future. Vestas is a proven winner that's showing no signs of surrendering its leading position in the global wind energy industry.
Renewable energy opportunities at a discount
These three companies run the gamut from wind to solar to a potentially disruptive transportation stock, but they all look like great values. And as renewable sources take over more and more of the energy market, they are among the companies with a lot of potential to reward investors.