As Borrowing Concerns Ease, This Solar Stock Is Expected To Rally More Than 30%

A comeback may be on the horizon for Sunrun as the interest rate tightening cycle approaches an end, according to KeyBanc.

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A 28.6% upside is implied by Sophie Karp's $27 price target, up from a sector weight of sector weight.

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In premarket trading, shares advanced 5.1%.

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As a result of the Federal Reserve's interest rate hike campaign, shares have fallen 14.4% despite the S&P 500's gains of 8.1%.

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During a note to clients on Monday, she said, “We recognize that the shares have been visibly inexpensive for some time now, as the shares of residential solar companies have underperformed materially since the beginning of the tightening cycle.” However, she noted the shares have underperformed materially since the beginning of the tightening cycle. This is, however, a point where we think the sentiment is beginning to bottom out at the lowest levels of the tightening cycle.

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Besides the fact that the company has an "attractive" valuation, Karp said the company ought to get some assistance due to its recent gains in California, a market that is closely monitored.

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Sunrun saw a relatively modest 10% drop in applications for interconnected project sites in the state between the first two months of 2022 and 2023, whereas there was a 22% decline for interconnected project sites in the state. As a result of this material gain, she said that it will ease the burden of the overall decline in performance caused by poor weather and changes to the net energy metering program, which can be attributed to poor weather conditions.

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She said the company's growth outside of California should be consistent with that elsewhere in the nation. According to Karp, the company will be able to reaffirm its earlier projection of a 10% to 15% increase in installed capacity for 2023. A positive outlook on demand was also offered during the company's earnings call for the first quarter.

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Data shows financing costs in 2022 and 2023 have been mostly in line with levels seen in 2018 and 2019, but prices have been higher than the lows seen in 2021. As benchmark rates moderate and the "normal" spread is reached, sentiment around funding should improve for the company.

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As a result of those potentially high borrowing costs, Karp said the company has underappreciated its pricing power. Higher interest rates should not be a problem for residential solar companies, according to her.

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It should also help, according to Karp, to take advantage of the Investment Tax Credit.

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There are large areas that could be more lucrative, such as Houston, which Sunrun and its peers may consider targeting. Energy communities and low-income customers can also benefit from the tax credit plan.

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Neither First Solar nor Plug Power were as bullish as Karp on the other solar stocks. Plug has tailwinds making an overweight rating untenable, while First Solar probably has hit its near-term ceiling.

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