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Why Shares of Array Technologies Sank 13% in July

By Scott Levine – Aug 4, 2021 at 1:58PM

Key Points

  • Rising steel prices are pressuring the company's gross margin.
  • Analysts are skeptical about the stock.

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Between rising steel prices and bearish sentiment from analysts, investors weren't feeling so sunny about this solar industry niche player last month.

What happened

Extending the precipitous slide that they endured in the first half of the year, shares of Array Technologies (ARRY 1.70%) lost another 13% in July, according to data from S&P Global Market Intelligence.

While the solar company did not report any significant news, it seems that the rising price of steel and Wall Street's bearish view of the stock were two key factors propelling that decline.

Wearing a hard hat and standing next to rows of solar panels a woman works on a tablet.

Image source: Getty Images.

So what

Array Technologies provides ground-mounting systems for solar power installations, and as such, it's sensitive to the price of steel -- a point that CEO Jim Fusaro directly addressed back in May on the company's Q1 2021 conference call: "Steel represents almost half of our cost of goods sold and we do not hold large amounts of steel in inventory. So, a significant increase in the price of steel over a short period of time can negatively impact our results."

Evidently, investors remembered this in July, a month during which the price of steel rose almost 5%, and concluded that the company's gross margin would be compressed in the third quarter.

ARRY Chart

ARRY data by YCharts.

Wall Street provided the other motivation that bears needed to sell their shares. On July 15, Piper Sandler reduced its price target on the stock to $24 from $27, though it kept an overweight rating, according to Thefly.com. Days later, Barclays also addressed Array's stock, upgrading it to equal weight from underweight on July 20. Investors, however, weren't impressed with the upgrade, focusing more on the fact that it kept its $15 price target. As of mid-afternoon Wednesday, Array was trading at around $13.30.

Now what

With the price of steel rising and analysts offering pessimistic views on the stock, it's unsurprising that shares dipped last month. The sell-off, however, seems to be the product of short-sighted thinking, offering patient investors an opportunity to pick up shares at a more attractive price.

Although higher steel prices may lead to a shrinking gross profit margin in the third quarter -- and possibly the fourth -- steel prices are cyclical and represent a near-term headwind -- not a factor that is fundamentally shaking the company's long-term growth prospects.

Scott Levine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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