Shoals Technologies Group - SHLS

Quick Take

I’ll be adding SHLS onto my interest list at the end of the month as a name to watch.  They came public in early 2021 the traditional way and have pretty much every single big name bulge bracket firm listed on either their IPO or their secondary.  Each of those offerings was at a higher price than the stock is currently trading, and along with the folks pushing it, makes me a bit cautious, but disappointing the market out of the gate and then using an acquisition to cover up at least some of that disappointment keeps me intrigued.

Shoals Technologies makes the electrical wiring harnesses that tie together arrays of solar panels.  Given the ESG direction this world is heading, I would guess that more solar farms are in this world’s future, so simplifying the wiring harnesses that tie them all together should be a growth industry.  Their pitch is basically that rather than hiring expensive electricians to string wire and conduits that tie together all the solar panels and deliver their power to the power grid, SHLS can basically pre-fabricate all of that wiring and make it into a system that even some grunt construction worker can manage to plug in at each end.  Sorta like using extension cords to string together some outdoor lights rather than hiring an electrician to come over and hardwire the whole display together.  More involved, perhaps, and maybe more elegant, but same result.

ConnectPV - SHLS acquired competitor ConnectPV in August 2021 for about $20.3M in cash and stock.  While they apparently have yet to file any audited financials for ConnectPV, the company’s filings says their contribution towards Q3 revenues and earnings was “immaterial” while in the 10K they mentioned that ConnectPV contributed $10M to overall revenues in 2021.  If we assume that number is evenly distributed by month, and looking back to the end of August close date, then ConnectPV contributed about $2.5M a month of revenues, or added about $7.5M to Q4 and $2.5M to Q3’s top line.  Pro forma’s in their 10K say that for 2021 they would have done $229.709M had ConnectPV been present for the entire year, which is $16.5M more than what they announced, giving ConnectPV revenues of about $26.5M for the year.  For 2020, pro forma’s tell us that they would have done about $25.4M more had they counted ConnectPV for the year.  In Q4, the company reported 24% year over year revenue growth and revenues of $48.0M vs. $38.8M in 2020.  Take out the ConnectPV and their estimated $7.5M revenue contribution, and you would have had about $40.5M in Q4 revenues and only 4% year over year growth.  Not exactly a growth rate one would expect from a high growth industry.

According to the pro forma’s, ConnectPV wasn’t really growing much, and was purchased at a less than 1x revenue multiple, for something that is considered to be in the same line of business, with margins supposedly about to normalize with their own margins.  SHLS, of course, is currently in the 14x revenue range, or perhaps 12x forward revenue estimates, which is substantially higher.  In general, when the market gives such a huge premium over private market valuations, it just annoys me.

Backlog – The backlog numbers are a bit hazy, since the company doesn’t break out what was ConnectPV related and what would have been orders for the base business.  Here they explain what makes up their most recent $299M backlog number:

“We had $299.0 million of backlog and awarded orders, backlog of $119.3 million represents signed purchase orders or contractual minimum purchase commitments with take-or-pay provisions and awarded orders of $179.7 million are orders we are in the process of documenting a contract but for which a contract has not yet been signed, as of December 31, 2021, representing a 94% and 10% increase relative to the same date last year and September 30, 2021, respectively.”

At the of 2020 they had $98.3M in signed backlog and $59.1M in unsigned backlog for a total ”backlog” of $157.4M.  Interesting that their actual “signed” backlog only grew from $98.3M to $119.3M, or maybe 21%, rather than the 94% number that they put in their headline.  If you go back through their filings, signed orders have been slowly creeping higher while their unsigned orders have just exploded.  We shall see if they ever manage to turn those into actual revenues.

What type of backlog did ConnectPV bring with them?  The last 5 backlog numbers, going back in time, go like this: $299M, $270.7M, $200.5M, $180.6M, and $157.4M.  There is that rather large gap between Q2 and Q3, which just happens to be the time when ConnectPV was purchased.  The gaps between the other quarters range between $20M - $30M, but the Q2-Q3 gap is $70M.  Now, perhaps their sales force just did an exceptional job and snagged a few large contracts, or more likely ConnectPV brought maybe $40M-$50M worth of backlog with them.  If so, then the

Slowing growth – Taking out their acquisition, Q4 revenue growth would have been 4% year over year, and Q3 was likely closer to 9% rather than 14%.  That is down from the 37% rate they announced in Q2 and the 12% they showed in Q1.  Overall, a pretty punk year, so probably no wonder that the company has not been able to hold and stay above their IPO or secondary price levels.  And when do you think the company announced their secondary?  On July 12th, when they pre-announced their 37% growth rate Q2 results.  Timing is indeed everything.

Should we trust the guidance?  The company is guiding revenues to be in the range of $300M - $350M for 2022, which would be up 40% to 65% year over year, which sounds pretty good.  That number of course includes an entire year’s worth of ConnectPV revenues, which adds maybe 7% or so to their growth rate, but still not too shabby.  In their Q1 2021 earnings release, they thought 2021 revenues would be in a range of $230M - $240M, and they came in at $213M, and that includes $10M from an acquisition, so about $30M less than planned.  The company blamed component shortages at their project sites for the delays, but figures all of the kinks to be worked out of the supply chain issues they experienced in 2021.  Q1 revenues are expected to be in the $68M - $74M range, significantly higher than the $48M they announced in Q4, but a decent chunk of the increase is supposedly due to some of the pushouts they saw due to supply chain disruptions throughout their business. They do have some new products coming out, though, and they have a new focus on wiring for the EV industry which they hope will gather some orders as well.

I tend to look at what these folks are doing as I do the folks that provide simplified cabling systems for wiring up just about anything, from stacks of servers and switches to assembly plants.  Pre-fab wiring harnesses and plug and play components certainly simplify the installation process, but I tend to think that over time margins likely suffer in the process.  On their Q4 earnings call, the company took a lot of questions from analysts who were questioning if the lower Q3 or Q4 margins (33%) which are expected to continue to decline and hopefully trough in Q1 and Q2 (around 30%) will eventually rise back up to their historical norms in the 40% range.  The company once again blamed it on pushouts and suppliers raising prices on them which they chose not to pass along to their customers, though the pessimist in me thinks that perhaps they were unable to do so.  We shall see if the company has this one right.