Shoals Earnings: New CEO Assumes Helm as Company Embarks on Next Chapter

We maintain our $20 per share fair value estimate for no-moat Shoals SHLS following its second-quarter earnings. We leave our 2023 and long-term financial estimates largely unchanged and see shares as slightly overvalued.

Shoals’ second-quarter results included few surprises, in our view, with the company reiterating its 2023 guidance. Gross margin slipped sequentially to 42% (from 46%) driven by a $9 million warranty provision for faulty wire from a specific supplier associated with a subset of products sold. The $9 million provision represents the low end of potential outcomes and the company noted this is an ongoing issue. We would expect this provision to grow in the coming quarters, but believe the company may have recovery potential from the supplier to help offset it.

Commercially, the company saw a relatively muted backlog and awarded orders growth sequentially (up 4%), and the number of customers was flat as well. However, we hesitate to read too much into such a data point and are encouraged by the company’s commentary regarding signing further master service agreements with customers (akin to the recent Blattner deal).

Shoals’ new CEO, Brandon Moss, assumed the position in mid-July. We believe Moss’ past experience at Southwire, where he led the development of adjacent product launches and international expansion, is why he was selected to lead Shoals into its next chapter. Shoals’ strategic growth plan continues to be centered on growing the share of customers’ wallets within the solar space (via new products, and storage) and expanding into new markets (electric vehicle charging, international solar). We take a more optimistic view toward the company’s potential to expand its share of customers’ wallet, while taking a wait-and-see approach with expanding into the international solar markets.