Canadian Solar: Q3 Changes the Trend

Dec.17.10 | About: Canadian Solar (CSIQ)

Canadian Solar’s (NASDAQ:CSIQ) overall shipments increased in the third quarter 2010 by 10%, reaching the 200 megawatt level and besting the company’s third quarter shipping guidance. Solar cell production is increasing and reducing reliance on third party purchases to fill customer orders. Revenues rebounded nicely in the third quarter 2010, as well as the company’s gross margin and net income margin. The company expects gross margin to improve as third party product purchases decrease. Fourth quarter of 2010 gross margin guidance projection is 17% to 18% compared to 17.3% in the third quarter. We calculated a positive operating cash flow for the company in the third quarter of 2010. Improved receivables collection helped to achieve the company’s second consecutive quarter of positive operating cash flows.

The company ranks in the bottom half of its peer group on six of the eight quantitative metrics. The company ranks 29th in operating cash flow-to-net income for the last-12 months based on our calculations. The company’s limited cash flow from operations in the last-12 months negatively impacts the company’s free cash flow-to-net income and cash conversion cycle ratios. As the company relies more on internally produced solar cells the company’s low ranking of 26th for gross margin for the last-12 months should improve. The company uses short-term debt as its main source of financing; however, the company issued 6.9 million shares of common stock in fiscal 2009 that raised over $100 million. The debt-to-equity and cash-to-debt ratios rank favorably in the industry at number 18 and 11, respectively.

Based on our calculations, the company’s cost per watt was below the industry average for six of last eight quarters. In the third quarter of 2010, the trend changed as cost per watt of $1.56 is 10.6% above the industry average. The company shipped 200.4 MW of solar cells in the third quarter 2010 compared to 181.2 MW in the second quarter 2010. While the company shipped 10.6% more in the third quarter of 2010; it also produced 18.2% more solar cells in the third quarter. Revenue per watt rose $0.07 per watt to $1.88 per watt in the third quarter of 2010 compared to $1.81 per watt in the second quarter. The company equaled the industry average for the third quarter 2010 even though revenues per watt on average are declining. The industry average fell 16.4% or $0.37 per watt in the third quarter versus the second quarter 2010. The company’s gross margin increased by 370 basis points to 17.3% in the third quarter of 2010 compared to the second quarter. The $0.33 margin per watt of in the third quarter of 2010 is a $.08 per watt improvement compared to $0.25 per watt in the second quarter.

The company’s quarterly earnings announcement does not include full cash flow statements or footnote disclosures. The company is downgraded to Ds for governance and disclosure due to material weaknesses in the company’s internal controls. The company disclosed it is in the process of correcting the control deficiencies, but “cannot assure you that the material weaknesses identified in this annual report will be adequately remedied or will be fully remedied by any specific date.” In addition the company’s material weaknesses caused the company to miss its Form 20-F filing deadline for the fiscal year ended Dec. 31, 2009.

Additional analysis of Canadian Solar and its peer group can be found here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.