Consolidating Production In Tennessee Will Boost Productivity Through Automation

Key Takeaways

• Expanding product offerings and international market entry are set to drive revenue growth and reduce U.S. market dependence.
  
• Consolidated production and strategic pricing actions are poised to enhance margins and boost profitability.
  
• Declines in revenue and gross profit, project delays, litigation risks, and slow international market impact revenue stability and growth at Shoals Technologies Group.

Catalysts

Provides electrical balance of system (EBOS) solutions and components in the United States and internationally.

• Shoals Technologies Group is expected to benefit from productivity improvements and strategic pricing actions that could enhance gross profit margins above 40% in the long term, influencing earnings positively.
  
• The company is actively expanding its product offerings, including new products like 2KV solutions, which could drive future revenue growth by enhancing cost-effectiveness and scalability in solar projects.
  
• Entering new international markets with localized products, evidenced by over $8 million in new projects in Australia and Chile, is anticipated to diversify revenue streams and reduce reliance on the U.S. market.
  
• Shoals is consolidating its production facilities into a single state-of-the-art factory in Tennessee, a move expected to boost productivity through automation and positively impact net margins.
  
• The continued development across sectors, such as commercial, community, and industrial sectors (CC&I), and battery energy storage systems (BESS), paired with a strategic focus on international market expansion, is projected to drive revenue growth and broaden the company's market presence.

Shoals Technologies Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shoals Technologies Group's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 14.6% in 3 years time.
• Analysts expect earnings to reach $78.4 million (and earnings per share of $0.45) by about April 2028, up from $24.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $99 million in earnings, and the most bearish expecting $64 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, down from 23.1x today. This future PE is lower than the current PE for the US Electrical industry at 21.8x.
• Analysts expect the number of shares outstanding to decline by 2.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.19%, as per the Simply Wall St company report.

Shoals Technologies Group Future Earnings Per Share Growth

Risks

• Shoals Technologies Group experienced an 18.4% decline in revenue in 2024, driven by project delays, which could continue to impact future revenue growth if market conditions or timelines remain unstable.
  
• Adjusted gross profit percentage decreased from the prior year due to product mix and competitive environment, signaling potential risks to maintaining high profit margins in a rapidly changing market.
  
• External factors such as political changes, labor and equipment availability, and regulatory delays contributed to volatility and project delays, posing ongoing risks to revenue and earnings stability.
  
• Ongoing litigation with Voltage could lead to unfavorable legal expenses and risks related to intellectual property defense, which could affect future earnings and operational focus.
  
• The international market has shown slow revenue conversion rates, and future improvements are needed to offset geographic concentration risks and maintain anticipated growth trajectories, affecting long-term revenue diversification and profit margins.

Valuation

• The analysts have a consensus price target of $6.291 for Shoals Technologies Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.5, and the most bearish reporting a price target of just $3.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $537.4 million, earnings will come to $78.4 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 8.2%.
• Given the current share price of $3.33, the analyst price target of $6.29 is 47.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.