Seven U.S. renewable energy companies are well-positioned to benefit from future interest rate cuts

What are we looking for?

Renewable energy companies with low financial leverage and high liquidity.

Screen

Last month, U.S. President Joe Biden’s administration proposed expanding the renewable energy tax credit to include alternative energy projects beyond wind and solar power. This proposal joins efforts to accelerate the approval of clean energy projects to spur growth of the renewable energy sector in the United States. If Biden is re-elected in November and continues his administration’s commitment to climate action, it will create a major growth opportunity for renewable energy companies.

Last week, the Bank of Canada announced a 25 basis point interest rate cut, which could signal a lower interest rate environment in the longer term. If the U.S. Federal Reserve follows suit, renewable energy companies with low leverage and high liquidity will have the greatest ability to take on more projects and gain market share as the cost of debt falls.

We’ve identified renewable energy companies that are well-positioned to succeed in a low-interest environment by using FactSet’s universal screening tool and following the following guidelines:

• Listed on the American stock exchange
• Market capitalization exceeding $1 billion
• Classified as part of the industrial manufacturing or utilities sector, according to FactSet, with a specialization in renewable energy (i.e. mixed alternatives, solar, wind, biomass, geothermal and hydropower)
• Debt to asset ratio below 0.5
• Net debt to EBITDA ratio below five
• Positive interest coverage ratio, a measure of a company’s ability to pay interest on outstanding debt
• A positive quick repayment ratio, which is a measure of liquidity

We ranked the seven remaining companies based on a multi-factor ranking of their net debt-to-EBITDA ratio and liquidity ratios. Net debt is calculated as the company’s total debt less cash and cash equivalents. Consequently, a lower net debt to EBITDA ratio signals a better ability to cover debt obligations in the short term. Additionally, companies with a high interest coverage and quick ratio are beneficial as it indicates a greater ability to pay interest and maintain liquidity, reducing the risk of insolvency.

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What we found

The U.S. Energy Information Administration projects that the renewable energy sector will generate 25% of the nation’s electricity by 2025, surpassing coal and nuclear power. While our screen is open to a variety of renewable energy sources, six of the seven companies that meet our criteria specialize in solar energy. Ormat Technologies Inc., ORA-N, a geothermal energy producer, was the only non-solar company on our screen. This demonstrates solar’s dominance in the US renewable space, and its presence will only grow as the US rushes to achieve its net zero emissions goal by 2050.

First Solar Inc., FSLR-Q – a solar panel company that ranks first on our screen. Among the companies that meet our criteria, First Solar is the leader with the lowest net debt to EBITDA ratio of -1.2. (Net debt is calculated as a company’s total debt minus cash and cash equivalents. If a company has more cash available than debt, the ratio can be negative.) First Solar also had the highest interest coverage ratio and quick ratio on our screen: Respectively 72.8 and 2.9. First Solar’s earnings release last month exceeded analyst expectations, showing first-quarter revenue of $794.1 million (not included in the table), a 45 percent increase over the prior year.

Nextracker Inc., NXT-Q is a manufacturer of photovoltaic equipment, second on our list of companies. Compared to its competitors on our screen, Nextracker had the second-lowest net debt-to-EBITDA ratio at -0.5 and the second-highest interest coverage ratio at 42.5. In May, the company announced its fourth-quarter results, reporting a profit of $736.5 million – higher than analysts’ expectations and an increase of 42% compared to last year.

Reservation: The information contained in this article does not constitute investment advice. FactSet shall not be liable for any consequences relating directly or indirectly to any action or omission taken in reliance on the information contained above.

Christine Elegado is a consultant at FactSet Canada.