Array Technologies

On the surface, Array Technologies Inc appears cheap due to significant downward price pressure over the past year. To incorporate the risk associated with a potential value trap, we have capped its rating at 3 stars. The stock currently trades at a 37% discount to our quantitative fair value estimate of $6.12 per share; however, caution is warranted due to this estimate's high uncertainty rating.

The company's profitability increases our fair value estimate. Highly profitable companies are often more resilient in recessions and are likely to generate stronger future cash flows for shareholders. For example, the firm's earnings yield of 14.2% ranks in the top 20% globally. This suggests that it is generating substantial earnings relative to its share price, which contributes to our view that shares are undervalued.

The company's balance sheet is an additional encouraging factor. Leverage can enable a company to invest in growth, potentially boosting shareholder value more than equity financing alone. The firm's EBITDA/interest coverage ratio of -0.1, for example, falls in the bottom 20% compared with peers globally. Although the firm's ability to cover interest payments with EBITDA is limited, shares could sharply rebound if economic circumstances change or recent investments reduce fears of default. This characteristic further promotes our favorable price/fair value ratio.

With its quantitative economic moat rating of none, this business is unlikely to consistently outearn its cost of capital without structural protection from competition. Additionally, the company's weak financial health rating could portend bankruptcy risk if economic conditions weaken.