KeyBanc Initiates Bullish Coverage Of Residential Solar Stocks

Solar stocks have been hot in 2019, but one analyst said Tuesday three residential solar stocks may soon be burning even brighter.

The Analyst

KeyBanc analyst Sophie Karp initiated residential solar coverage on the following three stocks:

Sunrun Inc RUN, Overweight rating, $19 target.
Sunnova Energy International Inc NOVA, Overweight rating, $13 target.
Vivint Solar Inc VSLR, Overweight rating, $12 target.

The Thesis

Karp said the recent sell-off in residential solar stocks has created a buying opportunity for long-term investors given the positive regulatory environment, large untapped market potential and improving solar economics. Solar equipment costs are falling while residential electricity rates are rising.

Karp estimates the total addressable residential solar market in the U.S. is $160 billion.

“With penetration rates in the low-single digits, we believe that the market is far from saturation, and any growth constraints would likely come from labor shortages and sales bottlenecks, and would be company-specific,” Karp wrote in a note.

Sunrun is differentiated from its peer group because of its best-in-class growth prospects, she said. Karp said Sunrun’s large R&D budget will likely lead to new revenue streams in grid services and other projects.

Vivint Solar provides the least risk for investors of the group, according to Karp. In fact, Vivint shares trade at a discount to its existing portfolio, providing downside protection and pricing in zero value for its growth opportunities.

Finally, Karp said Sunnova has the highest operational leverage of the group and needs disciplined and profitable growth to support additional upside. However, she values the company’s current portfolio at roughly $9 per share, so there is at least some downside support.